MAD risk parity portfolios

In this paper, we investigate the features and the performance of the risk parity (RP) portfolios using the mean absolute deviation (MAD) as a risk measure. The RP model is a recent strategy for asset allocation that aims at equally sharing the global portfolio risk among all the assets of an invest...

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Bibliographic Details
Published in:Annals of operations research 2024-05, Vol.336 (1-2), p.899-924
Main Authors: Ararat, Çağın, Cesarone, Francesco, Pınar, Mustafa Çelebi, Ricci, Jacopo Maria
Format: Article
Language:English
Subjects:
Asset allocation
Business and Management
Combinatorics
Datasets
Diversification
Efficiency
Empirical analysis
Expected values
Operations research
Operations Research/Decision Theory
Optimization
Original Research
Parity
Random variables
Risk
Theory of Computation
Universe
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Summary:In this paper, we investigate the features and the performance of the risk parity (RP) portfolios using the mean absolute deviation (MAD) as a risk measure. The RP model is a recent strategy for asset allocation that aims at equally sharing the global portfolio risk among all the assets of an investment universe. We discuss here some existing and new results about the properties of MAD that are useful for the RP approach. We propose several formulations for finding MAD-RP portfolios computationally, and compare them in terms of accuracy and efficiency. Furthermore, we provide extensive empirical analysis based on three real-world datasets, showing that the performances of the RP approaches generally tend to place both in terms of risk and profitability between those obtained from the minimum risk and the Equally Weighted strategies.
ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-023-05797-2