Uncertain Risk Parity

8 Pages Posted: 24 Jun 2019 Last revised: 25 Sep 2019

See all articles by Anish Shah

Anish Shah

Investment Grade Modeling

Date Written: June 18, 2019


Risk parity is portfolio construction technique that, using risk alone, scales each part of a portfolio — e.g., stocks, bonds, currencies, commodities — so that its contribution to net portfolio risk matches its budgeted risk. Because risks are measured using a point-estimate of covariance, the method is subject to problems arising from estimation error. This paper performs risk parity with covariance modeled as uncertain in order to achieve a weighting robust to changes in regime and hidden risks arising from misperceived hedging.

Keywords: Covariance, Estimation Error, Factor Models, Portfolio Construction, Regularization, Risk Parity, Uncertainty

JEL Classification: G11, C6

Suggested Citation

Shah, Anish, Uncertain Risk Parity (June 18, 2019). Available at SSRN: https://ssrn.com/abstract=3406321 or http://dx.doi.org/10.2139/ssrn.3406321

Anish Shah (Contact Author)

Investment Grade Modeling ( email )

210 Broadway #201
Cambridge, MA 02139
United States

HOME PAGE: http://www.linkedin.com/in/anishrshah

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