Comparing Risk Parity Portfolios Does a Tail-Risk Parity strategy provide better downside protection than the Risk Parity strategy during economic crisis?
(2021) NEKP01 20211Department of Economics
- Abstract (Swedish)
- This thesis evaluates the risk parity and tail-risk parity approach against conventional weight budgeting approach. The risk parity and tail-risk parity approach, in contrast to weight budgeting approach, is about distributing the risk between the asset classes in the portfolio. The risk, is traditionally measured in terms of volatility together with the assumption that returns follows a Gaussian distribution. In these thesis, different risk measure will be introduced together with an Empirical distribution. The main objective of this thesis is to evaluate and improve the tail-risk parity approach by applying Expected Shortfall as risk measure, to capture if it will provide a better protection against downside risk during the economic... (More)
- This thesis evaluates the risk parity and tail-risk parity approach against conventional weight budgeting approach. The risk parity and tail-risk parity approach, in contrast to weight budgeting approach, is about distributing the risk between the asset classes in the portfolio. The risk, is traditionally measured in terms of volatility together with the assumption that returns follows a Gaussian distribution. In these thesis, different risk measure will be introduced together with an Empirical distribution. The main objective of this thesis is to evaluate and improve the tail-risk parity approach by applying Expected Shortfall as risk measure, to capture if it will provide a better protection against downside risk during the economic crises; Dot-com bubble, Global Financial crisis and Covid-19 recession, as opposed to the risk parity approach with volatility as risk measure. Our results suggest, based on the performance measured in risk-adjusted returns, that the tail-risk adjusted approach had a superior performance in relation to risk parity and the weight budgeting approach during the full period. When considering the downside protection during the economic crisis, the tail-risk parity and risk parity approach performed fairly even, where tail-risk parity approach showed slightly higher risk-adjusted returns during Dot-com bubble and Covid-19 recession. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9062481
- author
- Johansson, Jesper LU and Omer, Mirza
- supervisor
- organization
- course
- NEKP01 20211
- year
- 2021
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Tail-risk parity, Risk parity, Expected Shortfall, Weight budgeting, Risk budgeting, Capital Allocation, Risk Contribution
- language
- English
- id
- 9062481
- date added to LUP
- 2021-08-17 14:47:16
- date last changed
- 2021-08-17 14:47:16
@misc{9062481,
abstract = {{This thesis evaluates the risk parity and tail-risk parity approach against conventional weight budgeting approach. The risk parity and tail-risk parity approach, in contrast to weight budgeting approach, is about distributing the risk between the asset classes in the portfolio. The risk, is traditionally measured in terms of volatility together with the assumption that returns follows a Gaussian distribution. In these thesis, different risk measure will be introduced together with an Empirical distribution. The main objective of this thesis is to evaluate and improve the tail-risk parity approach by applying Expected Shortfall as risk measure, to capture if it will provide a better protection against downside risk during the economic crises; Dot-com bubble, Global Financial crisis and Covid-19 recession, as opposed to the risk parity approach with volatility as risk measure. Our results suggest, based on the performance measured in risk-adjusted returns, that the tail-risk adjusted approach had a superior performance in relation to risk parity and the weight budgeting approach during the full period. When considering the downside protection during the economic crisis, the tail-risk parity and risk parity approach performed fairly even, where tail-risk parity approach showed slightly higher risk-adjusted returns during Dot-com bubble and Covid-19 recession.}},
author = {{Johansson, Jesper and Omer, Mirza}},
language = {{eng}},
note = {{Student Paper}},
title = {{Comparing Risk Parity Portfolios Does a Tail-Risk Parity strategy provide better downside protection than the Risk Parity strategy during economic crisis?}},
year = {{2021}},
}