MAD risk parity portfolios

Çağın Ararat (), Francesco Cesarone (), Mustafa Çelebi Pınar () and Jacopo Maria Ricci ()
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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

Annals of Operations Research, 2024, vol. 336, issue 1, No 29, 899-924

Abstract: 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.

Keywords: Mean absolute deviation; Risk parity; Portfolio optimization; Risk diversification (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10479-023-05797-2

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