Hierarchical risk parity using security selection based on peripheral assets of correlation-based minimum spanning trees

Younghwan Cho and Jae Wook Song

Finance Research Letters, 2023, vol. 53, issue C

Abstract: This study proposes hierarchical risk parity portfolios using a new correlation matrix and security selection. We suggest a global motion subtracted correlation matrix, which eliminates the global motion in the cross-correlation matrix. Also, we suggest utilizing the peripheral assets of a correlation-based minimum spanning tree for security selection. The proposed portfolio strategies with security selection outperform benchmarks, showing their nature as smart beta strategies. Specifically, the full correlation with a small number and global motion subtracted correlation with a relatively large number of selected assets exhibit decent performances during the post-crisis bull markets and crisis-induced bear markets, respectively.

Keywords: Portfolio management; Hierarchical risk parity; Global motion correlation; Minimum spanning tree; Security selection (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:53:y:2023:i:c:s154461232200784x

DOI: 10.1016/j.frl.2022.103608

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