Taking the Right Course Navigating the ERC Universe

60 Pages Posted: 13 Jun 2014

See all articles by Roberto Savona

Roberto Savona

University of Brescia - Department of Economics and Management

Cesare Orsini

Epsilon Associati Sgr S.p.A.

Date Written: April 30, 2014

Abstract

In this study, we explore the risk parity and equal risk contribution (ERC) investment strategies and propose an interpretation of their return dynamics conditioning on the states of the market. We also evaluate risk parity against other risk-only and risk-return approaches. Finally, we combine ERC-based portfolios using the regression-based approach of Britten-Jones (1999), thus obtaining a tangency portfolio to the ERC frontier. Using the results of a back-testing exercise from January 2001 to August 2013, we conclude that this tangent portfolio dominates traditional ERC, global minimum variance, and Markowitz portfolios in terms of both risk-adjusted performance and portfolio diversification measures.

Keywords: Portfolio Optimization, Risk Parity, Equal Risk Contribution, Regression Trees

JEL Classification: G11, G15, C14

Suggested Citation

Savona, Roberto and Orsini, Cesare, Taking the Right Course Navigating the ERC Universe (April 30, 2014). Available at SSRN: https://ssrn.com/abstract=2448832 or http://dx.doi.org/10.2139/ssrn.2448832

Roberto Savona (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Cesare Orsini

Epsilon Associati Sgr S.p.A. ( email )

Piazzetta Giordano dell’Amore n° 3
Milan, 20121
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
111
Abstract Views
853
Rank
444,645
PlumX Metrics