Economic Versus Statistical Clustering in Multi-Asset Multi-Factor Strategies

Risk & Reward, 2020, 1st issue, pp. 26-32

8 Pages Posted: 16 Mar 2020

See all articles by Martin Kolrep

Martin Kolrep

Invesco

Harald Lohre

Invesco; Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Erhard Radatz

Invesco

Carsten Rother

Invesco; University of Hamburg

Date Written: February 06, 2020

Abstract

Maximizing for diversification in the multi-asset multi-factor universe, the literature advances diversified risk parity strategies across economic clusters. For handling overly complex correlation matrices, hierarchical clustering techniques have recently been put forward to guide risk parity allocations. Indeed, such statistical clusters might be considered natural portfolio building blocks given that they automatically pick up the dependence structure and thus form meaningful ingredients to aid portfolio diversification. We explain the intuition and nature of hierarchical clustering techniques in the context of multi-asset multi-factor investing vis-à-vis the use of economic factors in diversified risk-based allocation paradigms such as 1/N, minimum-variance and diversified risk parity.

Keywords: Multi-asset multi-factor investing, diversification, hierarchical risk parity

JEL Classification: G11, D81

Suggested Citation

Kolrep, Martin and Lohre, Harald and Radatz, Erhard and Rother, Carsten, Economic Versus Statistical Clustering in Multi-Asset Multi-Factor Strategies (February 06, 2020). Risk & Reward, 2020, 1st issue, pp. 26-32. Available at SSRN: https://ssrn.com/abstract=3541868

Martin Kolrep

Invesco ( email )

An der Welle 5
Frankfurt, 60322
Germany

Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/research/research-centres/financial-econometrics/

Erhard Radatz

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

Carsten Rother

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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