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MAD risk parity portfolios

Author

Listed:
  • Çağın Ararat

    (Bilkent University - Department of Industrial Engineering)

  • Francesco Cesarone

    (Roma Tre University - Department of Business Studies)

  • Mustafa Çelebi Pınar

    (Bilkent University - Department of Industrial Engineering)

  • Jacopo Maria Ricci

    (Roma Tre University - Department of Business Studies
    Bergamo University - Department of Economics)

Abstract

In this paper, we investigate the features and the performance of the risk parity (RP) portfolios using the mean absolute deviation (MAD) as a risk measure. The RP model is a recent strategy for asset allocation that aims at equally sharing the global portfolio risk among all the assets of an investment universe. We discuss here some existing and new results about the properties of MAD that are useful for the RP approach. We propose several formulations for finding MAD-RP portfolios computationally, and compare them in terms of accuracy and efficiency. Furthermore, we provide extensive empirical analysis based on three real-world datasets, showing that the performances of the RP approaches generally tend to place both in terms of risk and profitability between those obtained from the minimum risk and the Equally Weighted strategies.

Suggested Citation

  • Çağın Ararat & Francesco Cesarone & Mustafa Çelebi Pınar & Jacopo Maria Ricci, 2024. "MAD risk parity portfolios," Annals of Operations Research, Springer, vol. 336(1), pages 899-924, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05797-2
    DOI: 10.1007/s10479-023-05797-2
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