Extending the Risk Parity Approach to Higher Moments: <i>Is There Any Value Added?</i>

Baitinger, Eduard; Dragosch, André; Topalova, Anastasia

doi:10.3905/jpm.2017.43.2.024

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Cited by 11 publications

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“…For example, non-quadratic measures of risk, such as skewness or kurtosis, would break rotational symmetry and possibly lead to meaningful fundamental risk factors that should be maximally diversified (see e.g. [19]). We leave this for future work.…”

Section: Perspectivesmentioning

confidence: 99%

Agnostic risk parity: taming known and unknown unknowns

Benichou¹,

Lempérière²,

Sérié³

et al. 2017

JOIS

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Markowitz' celebrated optimal portfolio theory generally fails to deliver out-of-sample diversification. In this note, we propose a new portfolio construction strategy based on symmetry arguments only, leading to "Eigenrisk Parity" portfolios that achieve equal realized risk on all the principal components of the covariance matrix. This holds true for any other definition of uncorrelated factors. We then specialize our general formula to the most agnostic case where the indicators of future returns are assumed to be uncorrelated and of equal variance. This "Agnostic Risk Parity" (AGP) portfolio minimizes unknown-unknown risks generated by over-optimistic hedging of the different bets. AGP is shown to fare quite well when applied to standard technical strategies such as trend following.

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Section: Perspectivesmentioning

confidence: 99%