Shrinkage Estimation in Risk Parity Portfolios

Alkafri, Nabil; Frey, Christoph

doi:10.2139/ssrn.3958710

Cited by 1 publication

(4 citation statements)

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“…Another continuum was identified in [ 5 ]. That continuum results from covariance shrinkage and does not connect the three portfolios.…”

Section: Discussionmentioning

confidence: 99%

“…An optimal estimator for k is proposed in [ 45 ]. Following [ 5 ], covariance is shrunk towards the identity matrix by increasing k from 0 to 1.…”

Section: Methodsmentioning

confidence: 99%

“…Starting with given risk budgets and iteratively applying the risk-budgeting procedure leads to the minimum-risk portfolio after an infinite number of iterations [ 4 ]. When volatility is the risk measure, shrinking the covariance matrix forces equal risk contribution portfolios towards equal weights [ 5 ]. The impact of shrinkage in risk parity portfolios and other portfolio construction processes is reviewed in [ 39 ].…”

Section: Theoretical Frameworkmentioning

confidence: 99%

“…Starting with equal weights and iteratively applying risk budgeting leads to minimum variance [ 4 ]. Conversely, starting with minimum variance and applying covariance shrinkage leads to equal weights [ 5 , 6 , 7 , 8 ].…”

Section: Introductionmentioning

confidence: 99%

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The Properties of Alpha Risk Parity Portfolios

Gava

Turc

2022

Entropy

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Risk parity is an approach to investing that aims to balance risk evenly across assets within a given universe. The aim of this study is to unify the most commonly-used approaches to risk parity within a single framework. Links between these approaches have been identified in the published literature. A key point in risk parity is being able to identify and control the contribution of each asset to the risk of the portfolio. With alpha risk parity, risk contributions are given by a closed-form formula. There is a form of antisymmetry—or self-duality—in alpha risk portfolios that lie between risk budgeting and minimum-risk portfolios. Techniques from information geometry play a key role in establishing these properties.

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“…Another continuum was identified in [ 5 ]. That continuum results from covariance shrinkage and does not connect the three portfolios.…”

Section: Discussionmentioning

confidence: 99%

“…An optimal estimator for k is proposed in [ 45 ]. Following [ 5 ], covariance is shrunk towards the identity matrix by increasing k from 0 to 1.…”

Section: Methodsmentioning

confidence: 99%