The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation

Andrew Clare, James Seaton, Peter Smith and Stephen Thomas

Discussion Papers from Department of Economics, University of York

Abstract: We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate. The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.

Keywords: Risk parity; trend following; momentum; global asset allocation; equities; bonds; commodities; real estate (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2012-09
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The trend is our friend: Risk parity, momentum and trend following in global asset allocation (2016)
Working Paper: The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:12/25

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