Diversifying Risk Parity

Lohre, Harald; Opfer, Heiko; Ország, Gábor

doi:10.2139/ssrn.1974446

Cited by 14 publications

(15 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Lohre et al () implement the above‐mentioned definition of a well‐diversified portfolio by constructing an allocation strategy, which allocates equal risk budgets to every uncorrelated principal portfolio. We obtain the weights

{boldw}_{D R P}^{P P}

of this strategy by solving

w_{D R P}^{P P} = {\underset{}{\arg \underset{w ε C}{normalmax}}}_{} N_{E n t} (w),

where the weights w may possibly be restricted according to a set of constraints C .…”

Section: Managing Diversificationmentioning

confidence: 99%

“…Conversely, N Ent ¼ N is obtained for a portfolio that is completely homogeneous in terms of uncorrelated risk sources. In this case, p i ¼ p j ¼ 1=N holds for all i; j, implying an entropy equal to lnðNÞ and N Ent ¼ N. Lohre et al (2014) implement the above-mentioned definition of a well-diversified portfolio by constructing an allocation strategy, which allocates equal risk budgets to every uncorrelated principal portfolio. We obtain the weights w PP DRP of this strategy by solving…”

Section: Diversifying By Principal Portfoliosmentioning

confidence: 99%

“…Recently, Lohre, Opfer, and Ország () have adopted the framework of Meucci () to determine maximum diversification portfolios in a multi‐asset allocation study. Their strategy coincides with a risk parity strategy that allocates risk by principal portfolios rather than by the underlying assets.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Maximum diversification strategies along commodity risk factors

Bernardi

Leippold

Lohre

2017

Euro Fin Management

Self Cite

View full text Add to dashboard Cite

Pursuing risk‐based allocation across a universe of commodity assets, we find diversified risk parity (DRP) strategies to provide convincing results. DRP strives for maximum diversification along uncorrelated risk sources. A straightforward way to derive uncorrelated risk sources relies on principal components analysis (PCA). While the ensuing statistical factors can be associated with commodity sector bets, the corresponding DRP strategy entails excessive turnover because of the instability of the PCA factors. We suggest an alternative design of the DRP strategy relative to common commodity risk factors that implicitly allows for a uniform exposure to commodity risk premia.

show abstract

{boldw}_{D R P}^{P P}

of this strategy by solving

w_{D R P}^{P P} = {\underset{}{\arg \underset{w ε C}{normalmax}}}_{} N_{E n t} (w),

where the weights w may possibly be restricted according to a set of constraints C .…”

Section: Managing Diversificationmentioning

confidence: 99%

Section: Diversifying By Principal Portfoliosmentioning

confidence: 99%

See 1 more Smart Citation

Maximum diversification strategies along commodity risk factors

Bernardi

Leippold

Lohre

2017

Euro Fin Management

Self Cite

View full text Add to dashboard Cite

show abstract

“…We also note that asset class risk contribution as defined by Equation (4) is different from the portfolio's risk factor exposure as defined by the emerging literature on risk factor-based risk parity strategies (see Bhansali [2011], Chaves et al [2012], and Lohre, Opfer, and Orszag [2012]). Therefore, parity in asset class contribution to the portfolio's total volatility should not be confused with parity in the true underlying risk factor exposure.…”

Section: F All 2012mentioning

confidence: 99%

Efficient Algorithms for Computing RiskParity Portfolio Weights

Chaves¹,

Hsu²,

Li³

et al. 2012

JOI

View full text Add to dashboard Cite

“…Recently, the Diversified Risk Parity (DRP) strategy, the analogue of the risk parity strategy of Maillard, Roncalli, and Teiletche (2010) but in the principal portfolio space, aims at equally weighting the contribution of each principal portfolio to the risk, where the risk is measured in terms of the volatilities of the PPs. The DRP strategy has been studied in Lohre, Neugebauer, and Zimmer (2012) with a focus on U.S. equities, and in Kind (2013) as well as Lohre, Opfer, and Ország (2014) in a multi-asset investment universe. In its optimal unconstrained version, the DRP strategy invests in each PP proportionally to the inverse of the square root of the corresponding eigenvalues, i.e., proportional to the inverse of the volatilities of the PPs.…”

Section: Introductionmentioning

confidence: 99%

Second-order risk of alternative risk parity strategies

Bernardi

Leippold

Lohre³

2019

JOR

Self Cite

View full text Add to dashboard Cite

The concept of second-order risk operationalizes the estimation risk in portfolio construction induced by model uncertainty. We study its contribution to the realized volatility of recently developed alternative risk parity strategies that invest in an uncorrelated decomposition of the asset universe. For each strategy, we derive closed-form solutions for the second-order risk, subsequently illustrated in empirical analysis based on real market data. The results suggest a relation between the contribution of second-order risk and the sensitivity of a portfolio to single eigenvectors of the covariance matrix of assets' returns. Among the strategies considered, we find the principal risk parity strategy, that invests equally in each eigenvector underlying the variance-covariance matrix, to be immune to second-order risk. For the other strategies, second-order risk can be partially mitigated by means of statistical methods. In particular, we provide evidence for the eigenvalue adjustment being the most effective method for correcting the the SOR bias.

show abstract

Diversifying Risk Parity

Cited by 14 publications

References 14 publications

Maximum diversification strategies along commodity risk factors

Maximum diversification strategies along commodity risk factors

Efficient Algorithms for Computing RiskParity Portfolio Weights

Second-order risk of alternative risk parity strategies

Contact Info

Product

Resources

About