Risk Distribution Among Uncorrelated Risk Factors: Diversified Risk Parity

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10.17065-huniibf.880072-1576556.pdf

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2022-03-01

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Yerli, Çiğdem
Kestel, Sevtap Ayşe

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This paper aims to distribute the risk among equity risk, interest rate risk and inflation risk, in a portfolio to prevent a risk concentrated portfolio by employing diversified risk parity (DRP) strategy. Principal component analysis and minimum linear torsion models are used to obtain DRP strategies which are compared with other risk based models and tested on five different asset classes whose prices are collected between January 1988 and December 2017. For attaining a thorough analysis, we include mean- variance optimization whose results are compared with both risk-based and DRP strategies in the out-of- sample testing using Sharpe ratio and uncorrelated risk factors. The results demonstrate that DRP strategies have better performance than other models. Specifically, DRP based on the minimum linear torsion model yields the highest Sharpe and risk diversification ratios. Thus, this strategy may guide the investors to construct risk diversified portfolios, especially, during financial crises.

Subject Keywords

Diversified Risk Parity, Principal Component Analysis, Minimum Linear Torsion Model, Risk Diversification, Çeşitlendirilmiş Risk Paritesi, Temel Bileşenler Analizi, Minimum Doğrusal Torsiyon Modeli, Risk Çeşitlendirme

URI

https://dergipark.org.tr/en/pub/huniibf/issue/70653/880072
https://hdl.handle.net/11511/101715

Journal

Hacettepe Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi

DOI

https://doi.org/10.17065/huniibf.880072

Collections

Graduate School of Applied Mathematics, Article

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Citation Formats

Ç. Yerli and S. A. Kestel, “Risk Distribution Among Uncorrelated Risk Factors: Diversified Risk Parity,” Hacettepe Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, vol. 40, no. 2, pp. 419–439, 2022, Accessed: 00, 2023. [Online]. Available: https://dergipark.org.tr/en/pub/huniibf/issue/70653/880072.