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Risk parity with expectiles

Author

Listed:
  • Bellini, Fabio
  • Cesarone, Francesco
  • Colombo, Christian
  • Tardella, Fabio

Abstract

A recent popular approach to portfolio selection aims at diversifying risk by looking for the so called Risk Parity portfolios. These are defined by the condition that the risk contributions of all assets to the global risk of the portfolio are equal. The Risk Parity approach has been originally introduced for the volatility risk measure. In this paper we consider expectiles as risk measures, we refine results on their differentiability and additivity, and we show how to define Risk Parity portfolios when the expectiles are used. Furthermore, we propose three different classes of methods for practically finding Risk Parity portfolios with respect to expectiles, and we compare the accuracy and efficiency of these methods on real-world data. Expectiles are also used as risk measures in the classical risk-return approach to portfolio selection, where we present a new linear programming formulation.

Suggested Citation

  • Bellini, Fabio & Cesarone, Francesco & Colombo, Christian & Tardella, Fabio, 2021. "Risk parity with expectiles," European Journal of Operational Research, Elsevier, vol. 291(3), pages 1149-1163.
    • Handle: RePEc:eee:ejores:v:291:y:2021:i:3:p:1149-1163
    DOI: 10.1016/j.ejor.2020.10.009
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    Citations

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    Cited by:

    1. Francesco Cesarone & Raffaello Cesetti & Giuseppe Orlando & Manuel Luis Martino & Jacopo Maria Ricci, 2022. "Comparing SSD-Efficient Portfolios with a Skewed Reference Distribution," Mathematics, MDPI, vol. 11(1), pages 1-20, December.
    2. Sebastian Jaimungal & Silvana M. Pesenti & Yuri F. Saporito & Rodrigo S. Targino, 2023. "Risk Budgeting Allocation for Dynamic Risk Measures," Papers 2305.11319, arXiv.org, revised Mar 2024.
    3. Guo, Sini & Gu, Jia-Wen & Fok, Christopher H. & Ching, Wai-Ki, 2023. "Online portfolio selection with state-dependent price estimators and transaction costs," European Journal of Operational Research, Elsevier, vol. 311(1), pages 333-353.
    4. Francesco Cesarone & Massimiliano Corradini & Lorenzo Lampariello & Jessica Riccioni, 2023. "A new behavioral model for portfolio selection using the Half-Full/Half-Empty approach," Papers 2312.10749, arXiv.org.
    5. Maziar Sahamkhadam, 2021. "Dynamic copula-based expectile portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 22(3), pages 209-223, May.
    6. da Costa, B. Freitas Paulo & Pesenti, Silvana M. & Targino, Rodrigo S., 2023. "Risk budgeting portfolios from simulations," European Journal of Operational Research, Elsevier, vol. 311(3), pages 1040-1056.
    7. Bernardo Freitas Paulo da Costa & Silvana M. Pesenti & Rodrigo S. Targino, 2023. "Risk Budgeting Portfolios from Simulations," Papers 2302.01196, arXiv.org.
    8. Lee, Tae Kyun & Sohn, So Young, 2023. "Alpha-factor integrated risk parity portfolio strategy in global equity fund of funds," International Review of Financial Analysis, Elsevier, vol. 88(C).
    9. Gilles Boevi Koumou, 2023. "Risk budgeting using a generalized diversity index," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 443-458, October.
    10. Zaevski, Tsvetelin S. & Nedeltchev, Dragomir C., 2023. "From BASEL III to BASEL IV and beyond: Expected shortfall and expectile risk measures," International Review of Financial Analysis, Elsevier, vol. 87(C).
    11. Francesco Cesarone & Manuel L. Martino & Fabio Tardella, 2023. "Mean-Variance-VaR portfolios: MIQP formulation and performance analysis," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(3), pages 1043-1069, September.
    12. Francesco Cesarone & Justo Puerto, 2024. "New approximate stochastic dominance approaches for Enhanced Indexation models," Papers 2401.12669, arXiv.org.
    13. Francesco Cesarone & Rosella Giacometti & Manuel Luis Martino & Fabio Tardella, 2023. "A return-diversification approach to portfolio selection," Papers 2312.09707, arXiv.org.

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