Tail Risk Management for Multi-Asset Multi-Factor Strategies
Risk & Reward, 2018, 4th issue, pp. 14-20
9 Pages Posted: 20 Feb 2019
Date Written: January 8, 2019
Multi-asset multi-factor portfolio allocation is typically centred around a risk-based allocation paradigm, often striving for maintaining equal volatility risk budgets. Given that the common factor ingredients can be highly skewed, we specifically incorporate the notion of tail risk management into the construction of multi-asset multi-factor portfolios. Indeed, we find that the minimum CVaR concentration approach of Boudt, Carl and Peterson (2013) effectively mitigates the dangers of tail risk concentrations. Yet, diversifying across multiple assets and style factors can be in and of itself a good means of tail risk management, irrespective of the risk-based allocation technique employed.
Keywords: Factor Investing, Tail Risk Management, Maximum Diversification, Risk Parity
JEL Classification: G11, D81
Suggested Citation: Suggested Citation