Risk Parity and the Limits of Leverage

2012 ◽  
Author(s):  
Michael D. Sebastian
Keyword(s):  
Risk Parity

At Par with Risk Parity?

2011 ◽  
Vol 28 (3) ◽  
pp. 67-73
Author(s):  
Samuel Kunz
Keyword(s):  
Risk Parity

scholarly journals Second-Order Risk of Alternative Risk Parity Strategies

2017 ◽  
Author(s):  
Simone Bernardi ◽  
Markus Leippold ◽  
Harald Lohre
Keyword(s):  
Second Order ◽  
Risk Parity

The Impact of Volatility Targeting

2018 ◽  
Keyword(s):  
Sharpe Ratio ◽  
Leverage Effect ◽  
Left Tail ◽  
Risk Parity ◽  
Asset Classes ◽  
Equity Portfolios ◽  
Sharpe Ratios ◽  
Tail Events ◽  
The Impact ◽  
Extreme Returns

Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. The authors show that this result only holds for risk assets, such as equity and credit, and they link this finding to the so-called leverage effect for those assets. In contrast, for bonds, currencies, and commodities, the impact of volatility targeting on the Sharpe ratio is negligible. However, the impact of volatility targeting goes beyond the Sharpe ratio: It reduces the likelihood of extreme returns across all asset classes. Particularly relevant for investors, left-tail events tend to be less severe because they typically occur at times of elevated volatility, when a target-volatility portfolio has a relatively small notional exposure. We also consider the popular 60–40 equity–bond balanced portfolio and an equity–bond–credit–commodity risk parity portfolio. Volatility scaling at both the asset and portfolio level improves Sharpe ratios and reduces the likelihood of tail events.

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