Risk Parity: Rewards, Risks, and Research Opportunities

Abstract

Mean–variance optimization has recently come under great criticism based on the poor performance experienced by asset managers during the global financial crisis. In response, an alternative approach, called risk parity, which proceeds by equalizing risk contributions, has garnered much interest. The authors summarize the work of a group of leading researchers on risk parity chosen for this special issue. They survey more generally what is known about this approach. Although risk parity has intuitive appeal and has performed well over some historical time periods, it is premature to claim the superiority of risk parity over other asset allocation approaches. The authors raise several conceptual and practical questions about risk parity that they think are worthy of additional research.

TOPICS: Analysis of individual factors/risk premia, volatility measures