Continuous Risk Adjustment – Does the Half-Life Have Implications for the Return Distribution

11 Pages Posted: 29 Sep 2015 Last revised: 22 Feb 2018

Date Written: September 29, 2015

Abstract

Risk Parity, Quantitative Trading strategies and Volatility Managed portfolios scales positions inversely to estimates of volatility. We study the impact of continuous risk adjustment for a set of Futures markets.

The shorter the half-life of a risk adjustment strategy is, the more normal our returns look like using a standard test for normality. Returns are still non-normally distributed, but for financial markets a continuous risk-adjustment process manages to create a more well behaved distribution.

The result has important impact for so called risk-parity portfolios that are thus not automatically riskier due to various optimization techniques and leverage, at least in the absence of heterogeneous methods to estimate and manage risk.

Keywords: Risk Parity, Volatility, Volatility Adjustments, Portfolio Construction, Volatility Estimation

JEL Classification: G1

Suggested Citation

Nilsson, Linus, Continuous Risk Adjustment – Does the Half-Life Have Implications for the Return Distribution (September 29, 2015). Available at SSRN: https://ssrn.com/abstract=2667156 or http://dx.doi.org/10.2139/ssrn.2667156

Linus Nilsson (Contact Author)

Independent ( email )

No Address Available

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