Conditional Risk-Based Portfolio

Olessia Caillé and Daria Onori

Finance, 2019, vol. 40, issue 2, 77-117

Abstract: Risk-based investment strategies such as Minimum Variance, Maximum Diversification, Equal Risk Contribution, Risk Parity, etc. share the common feature of being based on a risk measure, typically the covariance matrix of the asset returns. When one comes to implement these strategies, the usual approach consists in using an unconditional covariance matrix, simply estimated by the sample covariance matrix of past returns over a rolling window. An alternative consists in using a conditional covariance matrix computed from a multivariate GARCH-type model and which depends on information available to date. In this paper, we propose the first unifying and systematic comparison framework for the unconditional and conditional risk-based investment strategies. We compare their out-of-sample performances in terms of risk, returns and turnover (trading volume) with 4 criteria across 3 empirical datasets. Our results show that conditional risk-based strategies do not improve the out-of-sample Sharpe ratios as well as the ex-post risk, but logically increase the turnover.

Keywords: risk-based investment strategies; conditional risk measures; minimum variance; maximum diversification; equal risk contribution; risk parity (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cairn.info/load_pdf.php?ID_ARTICLE=FINA_402_0077 (application/pdf)
http://www.cairn.info/revue-finance-2019-2-page-77.htm (text/html)
free

Related works:
Working Paper: Conditional Risk-Based Portfolio (2019)
Working Paper: Conditional Risk-Based Portfolio (2018)
Working Paper: Conditional Risk-Based Portfolio (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cai:finpug:fina_402_0077

Access Statistics for this article

More articles in Finance from Presses universitaires de Grenoble
Bibliographic data for series maintained by Jean-Baptiste de Vathaire ().