Risk parity in US futures markets

Bernd Scherer ()
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Bernd Scherer: FTC Capital GmbH

Journal of Asset Management, 2012, vol. 13, issue 3, No 1, 155-161

Abstract: Abstract Risk parity allocates identical percentage contribution to risk to each individual asset. In the absence of established theoretical foundations, investors and product suppliers attribute the strong historical performance of risk parity portfolios to better diversification. This is an ill-founded belief. For US futures data I show that risk parity is not about diversification, but about higher return expectations for leveraged low-risk bonds. Although this is consistent with leverage aversion, it is incompatible with consumption-based asset pricing. In contrast to past work, I use futures data instead of diversified equity and bond indices. This allows concerns raised earlier about the availability of historic implementation costs or the historic price of leverage to be sidestepped.

Keywords: risk parity; leverage aversion; consumption-based asset pricing; low-risk anomaly; diversification (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1057/jam.2012.4

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