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Hierarchical Risk Parity for Portfolio Allocation in the Latin American NUAM Market

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  • Gonzalo Ramirez-Carrillo
  • David Ortiz-Mora
  • Alex Aguilar-Larrotta

Abstract

This study applies the Hierarchical Risk Parity (HRP) portfolio allocation methodology to the NUAM market, a regional holding that integrates the markets of Chile, Colombia and Peru. As one of the first empirical analyses of HRP in this newly formed Latin American context, the paper addresses a gap in the literature on portfolio construction under cross-border, emerging market conditions. HRP leverages hierarchical clustering and recursive bisection to allocate risk in a manner that is both interpretable and robust--avoiding the need to invert the covariance matrix, a common limitation in the traditional mean-variance optimization. Using daily data from 54 constituent stocks of the MSCI NUAM Index from 2019 to 2025, we compare the performance of HRP against two standard benchmarks: an equally weighted portfolio (1/N) and a maximum Sharpe ratio portfolio. Results show that while the Max Sharpe portfolio yields the highest return, the HRP portfolio delivers a smoother risk-return profile, with lower drawdowns and tracking error. These findings highlight HRP's potential as a practical and resilient asset allocation framework for investors operating in the integrated, high-volatility markets like NUAM.

Suggested Citation

  • Gonzalo Ramirez-Carrillo & David Ortiz-Mora & Alex Aguilar-Larrotta, 2025. "Hierarchical Risk Parity for Portfolio Allocation in the Latin American NUAM Market," Papers 2509.03712, arXiv.org.
    • Handle: RePEc:arx:papers:2509.03712
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    File URL: http://arxiv.org/pdf/2509.03712
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    References listed on IDEAS

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    1. Debjani Palit & Victor R. Prybutok, 2024. "A Study of Hierarchical Risk Parity in Portfolio Construction," Journal of Economic Analysis, Anser Press, vol. 3(3), pages 106-125, September.
    2. Jaydip Sen & Abhishek Dutta, 2022. "A Comparative Study of Hierarchical Risk Parity Portfolio and Eigen Portfolio on the NIFTY 50 Stocks," Papers 2210.00984, arXiv.org.
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