Towards Conditional Risk Parity — Improving Risk Budgeting Techniques in Changing Economic Environments

Lionel Martellini, Vincent Milhau, Andrea Tarelli: The present publication was produced as part of the “Asset Allocation Solutions” research chair at EDHEC-Risk Institute, in partnership with Lyxor Asset Management.

Auteur(s) :

Lionel Martellini

Professor of finance at EDHEC Business School and scientific director of EDHEC-Risk Institute.

Vincent Milhau

Deputy scientific director of EDHEC-Risk Institute.

Andrea Tarelli

Senior Research Engineer at EDHEC-Risk Institute.

This chair is examining performance portfolios with improved hedging benefits, hedging portfolios with improved performance benefits, and inflation risk and asset allocation solutions. The current paper, “Towards Conditional Risk Parity – Improving Risk Budgeting Techniques in Changing Economic Environments” looks at the topical issue of risk parity. It has become increasingly apparent that a portfolio that seems to be well-balanced in terms of dollar contributions can be extremely concentrated in terms of risk contributions because of differences in volatility and pairwise correlation levels amongst the constituents. In this context, risk parity, which assigns the same contribution to portfolio risk to all assets, has become an increasingly popular risk management methodology within and across asset classes. While intuitively appealing, this approach suffers from one major shortcoming, namely the fact that it is not explicitly sensitive to changes in market conditions. In particular, using the risk parity approach in an asset allocation context inevitably leads to a substantial overweighting of bonds versus equities, which might be a concern in a low bond yield and high dividend yield economic environment. In this paper, we introduce three distinct conditional risk parity strategies, explicitly designed to optimally respond to changes in state variables that have been used in the literature as proxies for the stochastically time-varying opportunity set. In an empirical analysis, we document the superiority in various economic regimes of such conditional risk parity strategies with respect to standard unconditional risk parity techniques.
Towards Conditional Risk Parity — Improving Risk Budgeting Techniques in Chang...
(-1.00 B)
Type : Publication EDHEC
Date : le 24/04/2014
Complément d'informations For more information, please contact EDHEC Research and Development Department [ ]
Pôle de recherche Finance

A voir également

 EDHEC Augmented Law Institute et Ubisoft signent un partenariat de recherche pour mettre l'innovation au service des directions juridiques
- 30-06-2020
L'EDHEC Augmented Law Institute est heureux d'annoncer la signature d'un partenariat d'...
L’Executive MBA de l’EDHEC classé parmi les meilleurs au monde selon le classement QS 2020
- 30-06-2020
Le programme Executive MBA de l’EDHEC est classé 45ème mondial sur 161 programmes (+6...
L’EDHEC Executive MBA dans le Top 10 européen selon le classement de The Economist 2020
- 29-06-2020
L’EDHEC Executive MBA est classé 17ème mondial sur 70 Business Schools et gagne 3 place...
Programme Grande École : des moments incroyables
- 23-06-2020
De quelle classe préparatoire êtes-vous issu ? Pourquoi avoir choisi l’EDHEC Business...