Soontornkit2010.java

package org.drip.sample.blacklitterman;

import org.drip.measure.bayesian.R1MultivariateConvolutionMetrics;
import org.drip.measure.continuous.MultivariateMeta;
import org.drip.measure.gaussian.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.numerical.linearalgebra.Matrix;
import org.drip.portfolioconstruction.allocator.*;
import org.drip.portfolioconstruction.asset.Portfolio;
import org.drip.portfolioconstruction.bayesian.*;
import org.drip.service.env.EnvManager;

/*
 * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
 */

/*!
 * Copyright (C) 2020 Lakshmi Krishnamurthy
 * Copyright (C) 2019 Lakshmi Krishnamurthy
 * Copyright (C) 2018 Lakshmi Krishnamurthy
 * Copyright (C) 2017 Lakshmi Krishnamurthy
 * Copyright (C) 2016 Lakshmi Krishnamurthy
 * 
 *  This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
 *      asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
 *      analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
 *      equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
 *      numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
 *      and computational support.
 *  
 *      https://lakshmidrip.github.io/DROP/
 *  
 *  DROP is composed of three modules:
 *  
 *  - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
 *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
 *  - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
 * 
 *  DROP Product Core implements libraries for the following:
 *  - Fixed Income Analytics
 *  - Loan Analytics
 *  - Transaction Cost Analytics
 * 
 *  DROP Portfolio Core implements libraries for the following:
 *  - Asset Allocation Analytics
 *  - Asset Liability Management Analytics
 *  - Capital Estimation Analytics
 *  - Exposure Analytics
 *  - Margin Analytics
 *  - XVA Analytics
 * 
 *  DROP Computational Core implements libraries for the following:
 *  - Algorithm Support
 *  - Computation Support
 *  - Function Analysis
 *  - Model Validation
 *  - Numerical Analysis
 *  - Numerical Optimizer
 *  - Spline Builder
 *  - Statistical Learning
 * 
 *  Documentation for DROP is Spread Over:
 * 
 *  - Main                     => https://lakshmidrip.github.io/DROP/
 *  - Wiki                     => https://github.com/lakshmiDRIP/DROP/wiki
 *  - GitHub                   => https://github.com/lakshmiDRIP/DROP
 *  - Repo Layout Taxonomy     => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
 *  - Javadoc                  => https://lakshmidrip.github.io/DROP/Javadoc/index.html
 *  - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
 *  - Release Versions         => https://lakshmidrip.github.io/DROP/version.html
 *  - Community Credits        => https://lakshmidrip.github.io/DROP/credits.html
 *  - Issues Catalog           => https://github.com/lakshmiDRIP/DROP/issues
 *  - JUnit                    => https://lakshmidrip.github.io/DROP/junit/index.html
 *  - Jacoco                   => https://lakshmidrip.github.io/DROP/jacoco/index.html
 * 
 *  Licensed under the Apache License, Version 2.0 (the "License");
 *      you may not use this file except in compliance with the License.
 *   
 *  You may obtain a copy of the License at
 *      http://www.apache.org/licenses/LICENSE-2.0
 *  
 *  Unless required by applicable law or agreed to in writing, software
 *      distributed under the License is distributed on an "AS IS" BASIS,
 *      WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
 *  
 *  See the License for the specific language governing permissions and
 *      limitations under the License.
 */

/**
 * <i>Soontornkit2010</i> reconciles the Outputs of the Black-Litterman Model Process. The References are:
 *  
 * <br><br>
 *  <ul>
 *      <li>
 *          Da, Z., and R. Jagannathan (2005): https://www3.nd.edu/~zda/TeachingNote_Black-Litterman.pdf
 *      </li>
 *      <li>
 *          He. G., and R. Litterman (1999): <i>The Intuition behind the Black-Litterman Model Portfolios</i>
 *              <b>Goldman Sachs Asset Management</b>
 *      </li>
 *      <li>
 *          Soontornkit, S. (2010): The Black-Litterman Approach to Asset Allocation
 *              http://www.bus.tu.ac.th/uploadPR/%E0%B9%80%E0%B8%AD%E0%B8%81%E0%B8%AA%E0%B8%B2%E0%B8%A3%209%20%E0%B8%A1%E0%B8%B4.%E0%B8%A2.%2053/Black-Litterman_Supakorn.pdf
 *      </li>
 *  </ul>
 *  
 * <br><br>
 *  <ul>
 *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/ProductCore.md">Product Core Module</a></li>
 *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/TransactionCostAnalyticsLibrary.md">Transaction Cost Analytics</a></li>
 *      <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">DROP API Construction and Usage</a></li>
 *      <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/blacklitterman/README.md">Canonical Black Litterman and Extensions</a></li>
 *  </ul>
 * <br><br>
 *
 * @author Lakshmi Krishnamurthy
 */

public class Soontornkit2010 {

    public static final void main (
        final String[] astArgs)
        throws Exception
    {
        EnvManager.InitEnv (
            "",
            true
        );

        double dblTau = 0.3;
        double dblRiskFreeRate = 0.03;
        double adblHistoricalBenchmarkReturn = 0.049;
        double dblHistoricalLongTermVariance = 0.0152;

        String[] astrID1 = new String[] {
            "AGRO & FOOD INDUSTRY    ",
            "CONSUMER PRODUCTS       ",
            "FINANCIALS              ",
            "INDUSTRIALS             ",
            "PROPERTY & CONSTRUCTION ",
            "RESOURCES               ",
            "SERVICES                ",
            "TECHNOLOGY              "
        };

        String[] astrID2 = new String[] {
            "ZRR3Y                   ",
            "AGRO & FOOD INDUSTRY    ",
            "CONSUMER PRODUCTS       ",
            "FINANCIALS              ",
            "INDUSTRIALS             ",
            "PROPERTY & CONSTRUCTION ",
            "RESOURCES               ",
            "SERVICES                ",
            "TECHNOLOGY              "
        };

        double[] adblMarketCapitalizationEstimate = new double[] {
            1118732.,
             143798.,
            3136108.,
            1727804.,
            2096000.,
            4497231.,
             816320.,
            1808058.
        };

        double[][] aadblAssetExcessReturnsCovariance = new double[][] {
            { 0.0013, -0.0010, -0.0005, -0.0009, -0.0019, -0.0004, -0.0014, -0.0008, -0.0006},
            {-0.0010,  0.0391,  0.0158,  0.0398,  0.0496,  0.0462,  0.0454,  0.0370,  0.0265},
            {-0.0005,  0.0158,  0.0118,  0.0150,  0.0203,  0.0204,  0.0191,  0.0161,  0.0111},
            {-0.0009,  0.0398,  0.0150,  0.0683,  0.0696,  0.0667,  0.0623,  0.0489,  0.0403},
            {-0.0019,  0.0496,  0.0203,  0.0696,  0.1029,  0.0809,  0.0829,  0.0629,  0.0471},
            {-0.0004,  0.0462,  0.0204,  0.0667,  0.0809,  0.0791,  0.0699,  0.0566,  0.0453},
            {-0.0014,  0.0454,  0.0191,  0.0623,  0.0829,  0.0699,  0.0943,  0.0557,  0.0481},
            {-0.0008,  0.0370,  0.0161,  0.0489,  0.0629,  0.0566,  0.0557,  0.0500,  0.0384},
            {-0.0006,  0.0265,  0.0111,  0.0403,  0.0471,  0.0453,  0.0481,  0.0384,  0.0473}
        };

        double[][] aadblAssetSpaceViewProjection = new double[][] {
            {  1.00,  0.00,  0.00,  0.00,  0.00,  0.00,  0.00,  0.00,  0.00},
            {  0.00,  0.00, -1.00,  0.00,  0.00,  0.00,  1.00,  0.00,  0.00},
            {  0.00,  0.00,  0.00, -0.41,  0.49,  0.00, -0.59,  0.00,  0.51}
        };

        double[] adblProjectionExpectedExcessReturns = new double[] {
            0.000,
            0.020,
            0.001
        };

        double[][] aadblProjectionExcessReturnsCovariance = new double[][] {
            {0.0013, 0.0000, 0.0000},
            {0.0000, 0.0679, 0.0000},
            {0.0000, 0.0000, 0.0132}
        };

        double[] adblMarketCapitalizationWeight1Reconciler = new double[] {
            0.07,
            0.01,
            0.20,
            0.11,
            0.14,
            0.29,
            0.05,
            0.12
        };

        double[] adblMarketCapitalizationWeight2Reconciler = new double[] {
            0.500,
            0.036,
            0.005,
            0.102,
            0.056,
            0.068,
            0.147,
            0.027,
            0.059
        };

        double[] adblExpectedExcessReturnReconciler = new double[] {
            0.0001,
            0.0221,
            0.0096,
            0.0312,
            0.0397,
            0.0361,
            0.0350,
            0.0280,
            0.0244
        };

        double[] adblAssetSpaceJointReturnsReconciler = new double[] {
            0.0336,
            0.0333,
            0.0315,
            0.0614,
            0.0562,
            0.0568,
            0.0577,
            0.0608
        };

        R1MultivariateNormal viewDistribution = R1MultivariateNormal.Standard (
            new MultivariateMeta (
                new String[] {
                    "PROJECTION #1",
                    "PROJECTION #2",
                    "PROJECTION #3"
                }
            ),
            adblProjectionExpectedExcessReturns,
            aadblProjectionExcessReturnsCovariance
        );

        double dblRiskAversion = RiskUtilitySettingsEstimator.EquilibriumRiskAversion (
            adblHistoricalBenchmarkReturn,
            dblRiskFreeRate,
            dblHistoricalLongTermVariance
        );

        double[] adblMarketCapitalizationWeight2 = new double[adblMarketCapitalizationEstimate.length + 1];
        double[] adblMarketCapitalizationWeight1 = new double[adblMarketCapitalizationEstimate.length];
        adblMarketCapitalizationWeight2[0] = 0.50;
        double dblTotalMarketCapitalization = 0.;

        for (int i = 0; i < adblMarketCapitalizationEstimate.length; ++i)
            dblTotalMarketCapitalization += adblMarketCapitalizationEstimate[i];

        for (int i = 0; i < adblMarketCapitalizationEstimate.length; ++i) {
            adblMarketCapitalizationWeight1[i] = adblMarketCapitalizationEstimate[i] / dblTotalMarketCapitalization;
            adblMarketCapitalizationWeight2[i + 1] = 0.5 * adblMarketCapitalizationWeight1[i];
        }

        double[] adblExpectedExcessReturn = Matrix.Product (
            aadblAssetExcessReturnsCovariance,
            adblMarketCapitalizationWeight2
        );

        for (int i = 0; i < adblExpectedExcessReturn.length; ++i)
            adblExpectedExcessReturn[i] *= dblRiskAversion;

        BlackLittermanCombinationEngine blce = new BlackLittermanCombinationEngine (
            ForwardReverseHoldingsAllocation.Reverse (
                Portfolio.Standard (
                    astrID2,
                    adblMarketCapitalizationWeight2
                ),
                aadblAssetExcessReturnsCovariance,
                dblRiskAversion
            ),
            new PriorControlSpecification (
                false,
                dblRiskFreeRate,
                dblTau
            ),
            new ProjectionSpecification (
                viewDistribution,
                aadblAssetSpaceViewProjection
            )
        );

        R1MultivariateConvolutionMetrics jpm = blce.customConfidenceRun().jointPosteriorMetrics();

        R1MultivariateNormal jointDistribution = (R1MultivariateNormal) jpm.joint();

        R1MultivariateNormal posteriorDistribution = (R1MultivariateNormal) jpm.posterior();

        double[] adblAssetSpaceJointReturns = jointDistribution.mean();

        double[][] aadblAssetSpaceJointCovariance = jointDistribution.covariance().covarianceMatrix();

        double[][] aadblAssetSpacePosteriorCovariance = posteriorDistribution.covariance().covarianceMatrix();

        System.out.println ("\n\t|------------------------||");

        System.out.println ("\t| TAU   => " + FormatUtil.FormatDouble (dblTau, 1, 8, 1.) + "   ||");

        System.out.println ("\t| DELTA => " + FormatUtil.FormatDouble (dblRiskAversion, 1, 8, 1.) + "   ||");

        System.out.println ("\t|------------------------||");

        System.out.println ("\n\t||-------------------------------------------||");

        System.out.println ("\t||    MARKET CAPITALIZATION RECONCILER #1    ||");

        System.out.println ("\t||-------------------------------------------||");

        System.out.println ("\t||           SECTOR         =>  WT. |  PAPER ||");

        System.out.println ("\t||-------------------------------------------||");

        for (int i = 0; i < adblMarketCapitalizationEstimate.length; ++i)
            System.out.println (
                "\t|| " + astrID1[i] + " => " +
                    FormatUtil.FormatDouble (adblMarketCapitalizationWeight1[i], 2, 0, 100.) + "% |  " +
                    FormatUtil.FormatDouble (adblMarketCapitalizationWeight1Reconciler[i], 2, 0, 100.) + "%  ||"
            );

        System.out.println ("\t||-------------------------------------------||\n");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||      MARKET CAPITALIZATION RECONCILER #2     ||");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||           SECTOR         => WEIGHT |  PAPER  ||");

        System.out.println ("\t||----------------------------------------------||");

        for (int i = 0; i <= adblMarketCapitalizationEstimate.length; ++i)
            System.out.println (
                "\t|| " + astrID2[i] + " => " +
                    FormatUtil.FormatDouble (adblMarketCapitalizationWeight2[i], 2, 1, 100.) + "% | " +
                    FormatUtil.FormatDouble (adblMarketCapitalizationWeight2Reconciler[i], 2, 1, 100.) + "%  ||"
            );

        System.out.println ("\t||----------------------------------------------||\n");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||             IMPLIED EXCESS RETURN            ||");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||           SECTOR         => RETURN |  PAPER  ||");

        System.out.println ("\t||----------------------------------------------||");

        for (int i = 0; i < adblExpectedExcessReturn.length; ++i)
            System.out.println (
                "\t|| " + astrID2[i] + " => " +
                    FormatUtil.FormatDouble (adblExpectedExcessReturn[i], 1, 2, 100.) + "% | " +
                    FormatUtil.FormatDouble (adblExpectedExcessReturnReconciler[i], 1, 2, 100.) + "%  ||"
            );

        System.out.println ("\t||----------------------------------------------||\n");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||             IMPLIED MARKET RETURN            ||");

        System.out.println ("\t||----------------------------------------------||");

        System.out.println ("\t||           SECTOR         => RETURN |  PAPER  ||");

        System.out.println ("\t||----------------------------------------------||");

        for (int i = 0; i < adblExpectedExcessReturn.length; ++i)
            System.out.println (
                "\t|| " + astrID2[i] + " => " +
                    FormatUtil.FormatDouble (adblExpectedExcessReturn[i] + dblRiskFreeRate, 1, 2, 100.) + "% | " +
                    FormatUtil.FormatDouble (adblExpectedExcessReturnReconciler[i] + dblRiskFreeRate, 1, 2, 100.) + "%  ||"
            );

        System.out.println ("\t||----------------------------------------------||\n");

        System.out.println ("\n\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|                           PRIOR CROSS ASSET COVARIANCE MATRIX                                  ||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        String strHeader = "\t|     |";

        for (int i = 0; i < astrID2.length; ++i)
            strHeader += "    " + astrID2[i] + "     |";

        System.out.println (strHeader + "|");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        for (int i = 0; i < astrID2.length; ++i) {
            String strDump = "\t| " + astrID2[i] + " ";

            for (int j = 0; j < astrID2.length; ++j)
                strDump += "|" + FormatUtil.FormatDouble (aadblAssetExcessReturnsCovariance[i][j], 1, 8, 1.) + " ";

            System.out.println (strDump + "||");
        }

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\n\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|                          VIEW SCOPING ASSET PROJECTION LOADING                                 ||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        strHeader = "\t|     |";

        for (int i = 0; i < astrID2.length; ++i)
            strHeader += "    " + astrID2[i] + "     |";

        System.out.println (strHeader + "|");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        for (int i = 0; i < aadblAssetSpaceViewProjection.length; ++i) {
            String strDump = "\t|  #" + i + " ";

            for (int j = 0; j < astrID2.length; ++j)
                strDump += "|" + FormatUtil.FormatDouble (aadblAssetSpaceViewProjection[i][j], 1, 8, 1.) + " ";

            System.out.println (strDump + "||");
        }

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\n\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        for (int i = 0; i < aadblAssetSpaceViewProjection.length; ++i) {
            String strDump = "\t|  #" + i + " ";

            for (int j = 0; j < aadblAssetSpaceViewProjection.length; ++j)
                strDump += "|" + FormatUtil.FormatDouble (aadblProjectionExcessReturnsCovariance[i][j], 1, 8, 1.) + " ";

            System.out.println (strDump + "|" + FormatUtil.FormatDouble (adblProjectionExpectedExcessReturns[i], 1, 2, 100.) + "%");
        }

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\n\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|                           JOINT CROSS ASSET COVARIANCE MATRIX                                  ||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        strHeader = "\t|     |";

        for (int i = 0; i < astrID2.length; ++i)
            strHeader += "    " + astrID2[i] + "     |";

        System.out.println (strHeader + "|");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        for (int i = 0; i < astrID2.length; ++i) {
            String strDump = "\t| " + astrID2[i] + " ";

            for (int j = 0; j < astrID2.length; ++j)
                strDump += "|" + FormatUtil.FormatDouble (aadblAssetSpaceJointCovariance[i][j], 1, 8, 1.) + " ";

            System.out.println (strDump + "||");
        }

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\n\t|------------------------------------------------------------------------------------------------||");

        System.out.println ("\t|                         POSTERIOR CROSS ASSET COVARIANCE MATRIX                                ||");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        strHeader = "\t|     |";

        for (int i = 0; i < astrID2.length; ++i)
            strHeader += "    " + astrID2[i] + "     |";

        System.out.println (strHeader + "|");

        System.out.println ("\t|------------------------------------------------------------------------------------------------||");

        for (int i = 0; i < astrID2.length; ++i) {
            String strDump = "\t| " + astrID2[i] + " ";

            for (int j = 0; j < astrID2.length; ++j)
                strDump += "|" + FormatUtil.FormatDouble (aadblAssetSpacePosteriorCovariance[i][j], 1, 8, 1.) + " ";

            System.out.println (strDump + "||");
        }

        System.out.println ("\t|------------------------------------------------------------------------------------------------||\n");

        System.out.println ("\t|------------------------||");

        System.out.println ("\t| JOINT/POSTERIOR RETURN ||");

        System.out.println ("\t|------------------------||");

        System.out.println ("\t|   ID  => RIOC  | HL99  ||");

        System.out.println ("\t|------------------------||");

        for (int i = 0; i < adblAssetSpaceJointReturnsReconciler.length; ++i) {
            System.out.println (
                "\t| [" + astrID2[i] + "] =>" +
                FormatUtil.FormatDouble (adblAssetSpaceJointReturns[i], 2, 2, 100.) + "% |" +
                FormatUtil.FormatDouble (adblAssetSpaceJointReturnsReconciler[i], 2, 2, 100.) + "% ||"
            );
        }

        System.out.println ("\t|------------------------||");

        EnvManager.TerminateEnv();
    }
}