Robust Portfolio Allocation with Systematic Risk Contribution Restrictions
AbstractThe standard mean-variance approach can imply extreme weights in some assets in the optimal allocation and a lack of stability of this allocation over time. To improve the robustness of the portfolio allocation, but also to better control for the portfolio turnover and the sensitivity of the portfolio to systematic risk, it is proposed in this paper to introduce additional constraints on both the total systematic risk contribution of the portfolio and its turnover. Our paper extends the existing literature on risk parity in three directions: i) we consider other risk criteria than the variance, such as the Value-at-Risk (VaR), or the Expected Shortfall; ii) we manage separately the systematic and idiosyncratic components of the portfolio risk; iii) we introduce a set of portfolio management approaches which control for the degree of market neutrality of the portfolio, for the strength of the constraint on systematic risk contribution and for the turnover
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Bibliographic InfoPaper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2012-35.
Date of creation: Dec 2012
Date of revision:
Asset Allocation; Portfolio Turnover; Risk Diversification; Minimum Variance Portfolio; Risk Parity Portfolio; Systematic Risk; Euler Allocation; Hedge Fund;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-BAN-2013-06-04 (Banking)
- NEP-RMG-2013-06-04 (Risk Management)
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