Robust Portfolio Allocation with Systematic Risk Contribution Restrictions

48 Pages Posted: 22 Dec 2012

See all articles by Serge Darolles

Serge Darolles

Université Paris Dauphine - DRM-CEREG

Christian Gourieroux

University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Jay Emmanuelle

QUANTED; Fideas Capital

Date Written: October 25, 2012

Abstract

The standard mean-variance approach can imply extreme weights in some assets in the optimal allocation and a lack of stability of this allocation over time. To improve the robustness of the portfolio allocation, but also to better control for the portfolio turnover and the sensitivity of the portfolio to systematic risk, it is proposed in this paper to introduce additional constraints on both the total systematic risk contribution of the portfolio and its turnover. Our paper extends the existing literature on risk parity in three directions: i) we consider other risk criteria than the variance, such as the Value-at-Risk (VaR), or the Expected Shortfall; ii) we manage separately the systematic and idiosyncratic components of the portfolio risk; iii) we introduce a set of portfolio management approaches which control for the degree of market neutrality of the portfolio, for the strength of the constraint on systematic risk contribution and for the turnover.

Keywords: Asset Allocation, Portfolio Turnover, Risk Diversification, Minimum Variance Portfolio, Risk Parity Portfolio, Systematic Risk, Euler Allocation, Hedge Fund

JEL Classification: G12, C23

Suggested Citation

Darolles, Serge and Gourieroux, Christian and Emmanuelle, Jay, Robust Portfolio Allocation with Systematic Risk Contribution Restrictions (October 25, 2012). Available at SSRN: https://ssrn.com/abstract=2192399 or http://dx.doi.org/10.2139/ssrn.2192399

Serge Darolles (Contact Author)

Université Paris Dauphine - DRM-CEREG ( email )

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Christian Gourieroux

University of Toronto - Department of Economics ( email )

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Toronto, Ontario M5S 3G7
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Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE) ( email )

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France
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National Bureau of Economic Research (NBER)

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Jay Emmanuelle

QUANTED ( email )

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Paris, 75010
France
+33630207679 (Phone)

Fideas Capital ( email )

21 avenue de l'Opéra
Paris, 75001
France
+33630207679 (Phone)

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