Continuous Risk Adjustment – Does the Half-Life Have Implications for the Return Distribution
11 Pages Posted: 29 Sep 2015 Last revised: 18 Oct 2019
Date Written: September 29, 2015
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: Suggested Citation