Long-only equal risk contribution portfolios for CVaR under discrete distributions

Helmut Mausser and Oleksandr Romanko

Quantitative Finance, 2018, vol. 18, issue 11, 1927-1945

Abstract: Portfolios in which all assets contribute equally to the conditional value-at-risk (CVaR) represent an interesting variation of the popular risk parity investment strategy. This paper considers the use of convex optimization to find long-only equal risk contribution (ERC) portfolios for CVaR given a set of equally likely scenarios of asset returns. We provide second-order conic and non-linear formulations of the problem, which yields an ERC portfolio when CVaR is both positive and differentiable at the optimal solution. We identify sufficient conditions for differentiability and develop a heuristic that obtains an approximate ERC portfolio when the conditions are not satisfied. Computational tests show that the approach performs well compared to non-convex formulations that have been proposed in the literature.

Date: 2018
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Citations: View citations in EconPapers (12)

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DOI: 10.1080/14697688.2018.1434317

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