Risk-Based Investing in the German Stock Market

Bastin, Jan

doi:10.18267/j.pep.643

Cited by 2 publications

(2 citation statements)

References 19 publications

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“…Also, this paper supports the findings that dynamic or time-varying covariance improves performance (Nugroho, 2021a). Moreover, this paper shows that risk-based investing or ERC is more viable than a traditional minimum variance which is also in line with a recent literature (Bastin, 2018).…”

Section: Discussionsupporting

confidence: 90%

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The best-fitting model(s) of equal risk contribution: evidence from environmental-friendly portfolio

Nugroho

2022

IJMF

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PurposeThis research aims to select the best-fitting model(s) of equal risk contribution portfolios (ERC). ERC is a robust estimation in the absence of reasonable expectations about future returns.Design/methodology/approachThe portfolio consists of five environmental-friendly exchange-traded funds (ETFs). It applies equal risk optimization, beneficial when the assets are firmly linked, such as the ETFs. This paper operationalizes 20 covariance models in portfolio construction, and a portfolio with classic covariance is the benchmark to beat. To select the best-fitting model(s), the paper applies statistical inferences of the model confidence set. This research also constructs the newly-developed minimum connectedness optimization method and utilizes maximum drawdown as the primary evaluation tool.FindingsThe outbreak of COVID-19 hugely impacts the portfolio drawdown. The results also show that the classic covariance is hard to beat, partly explained by estimation error and model misspecification. This paper suggests that equal risk contribution can benefit from copula-based covariance. It consistently and significantly outperforms the other models in various robustness tests.Practical implicationsIn the absence of substantial predictions about future returns and the existence of strongly linked assets, selecting appropriate portfolio components by risk contribution is a sound choice.Originality/valueThis is the first paper to select the best-fitting model(s) of ERC portfolio during the COVID-19.

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Section: Discussionsupporting

confidence: 90%

“…The modern portfolio theory assumes investors are not risk-takers. Theoretically, covariance is the foundation of portfolio construction (Bastin, 2018). However, the classic covariance and mean-variance optimization have been highly criticized (Kim et al, 2021).…”

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confidence: 99%