Asset allocation using trend following and risk parity approaches
Autor(a) principal: | |
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Data de Publicação: | 2021 |
Tipo de documento: | Dissertação |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10071/24782 |
Resumo: | The post-crisis period revealed the ineffectiveness of many allocation strategies and the need of investors to avoid significant losses during recession and recovery periods. After a remarkable performance, in 2008, Trend Following – a strategy that takes long positions in assets with positive returns and short positions in assets with negative returns – became unsuccessful in generating constant positive returns. Generally, these strategies are constructed using futures contracts across all asset classes. Additionally, they are usually formed using weights that are inversely proportional to assets’ volatilities and have historically experienced good diversification features. However, in the period 2009-2013, the strategy became suboptimal due to the increase of pairwise correlations between and across asset classes. The increase in co-movements led to the rise of Risk Parity, a long-only allocation approach that provides equal risk contribution. Extending this approach to a long-short approach, it constructs the Trend Following Risk Parity strategy that is being studied in this dissertation. With the combination of both, it is expected that it achieves better performance compared with the strategies alone since it allows higher returns associated with Trend Following and lower volatility linked with Risk Parity. Using 38 futures contracts from 6 different asset classes over a 31-year period, risk-based portfolios show an effective improvement to traditional strategies, with some approaches performing better than others. The Trend Following Risk Parity approach achieved superior results in performance ratios, especially in high correlation periods and tougher market downturns, delivering an overall better risk-adjusted return than all other portfolios. |
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Asset allocation using trend following and risk parity approachesAsset allocationDiversificação -- DiversificationPortfolio choiceRisk parityTrend followingAlocação de ativosEscolha de portfólioParidade de riscoTendência - TrendThe post-crisis period revealed the ineffectiveness of many allocation strategies and the need of investors to avoid significant losses during recession and recovery periods. After a remarkable performance, in 2008, Trend Following – a strategy that takes long positions in assets with positive returns and short positions in assets with negative returns – became unsuccessful in generating constant positive returns. Generally, these strategies are constructed using futures contracts across all asset classes. Additionally, they are usually formed using weights that are inversely proportional to assets’ volatilities and have historically experienced good diversification features. However, in the period 2009-2013, the strategy became suboptimal due to the increase of pairwise correlations between and across asset classes. The increase in co-movements led to the rise of Risk Parity, a long-only allocation approach that provides equal risk contribution. Extending this approach to a long-short approach, it constructs the Trend Following Risk Parity strategy that is being studied in this dissertation. With the combination of both, it is expected that it achieves better performance compared with the strategies alone since it allows higher returns associated with Trend Following and lower volatility linked with Risk Parity. Using 38 futures contracts from 6 different asset classes over a 31-year period, risk-based portfolios show an effective improvement to traditional strategies, with some approaches performing better than others. The Trend Following Risk Parity approach achieved superior results in performance ratios, especially in high correlation periods and tougher market downturns, delivering an overall better risk-adjusted return than all other portfolios.O período pós-crise revelou a ineficácia de muitas estratégias de alocação e a necessidade dos investidores evitarem perdas significativas durante períodos de recessão e recuperação. Após um desempenho notável, em 2008, a Trend Following – uma estratégia que adota posições longas em ativos com retorno positivo e posições curtas em ativos com retorno negativo – tornou-se infrutífera na geração de retornos positivos constantes. Geralmente, estas estratégias são construídas usando contratos de futuros das várias classes de ativos. São, ainda, geralmente formadas usando pesos que são inversamente proporcionais à volatilidade de cada ativo e têm historicamente experienciado boas características de diversificação. No entanto, no período 2009-2013, a estratégia tornou-se ineficiente devido ao aumento das correlações entre ativos e classes de ativos. O aumento de co-movimentos levou ao aumento da importância da estratégia Risk Parity, que proporciona uma contribuição igualitária de risco. Alargando a posições longas e curtas, constrói-se a estratégia Trend Following Risk Parity estudada nesta dissertação. Com a combinação, espera-se conseguir um melhor desempenho em comparação com as estratégias individuais, dado que permite retornos mais elevados associados à Trend Following com menor volatilidade ligada à Risk Parity. Utilizando 38 contratos de futuros de 6 classes de ativos num período de 31 anos, portfolios baseados no risco mostraram uma melhoria eficaz face às estratégias tradicionais, com algumas estratégias a terem um desempenho superior. A Trend Following Risk Parity obteve resultados superiores nos rácios de desempenho, especialmente em períodos de recessão e maiores correlações, proporcionando um retorno maior do que as outras carteiras.2022-12-14T00:00:00Z2021-12-14T00:00:00Z2021-12-142021-10info:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/masterThesisapplication/pdfhttp://hdl.handle.net/10071/24782TID:202887359engFernandes, João Pedroinfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-11-09T17:39:06Zoai:repositorio.iscte-iul.pt:10071/24782Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T22:17:57.296383Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Asset allocation using trend following and risk parity approaches |
title |
Asset allocation using trend following and risk parity approaches |
spellingShingle |
Asset allocation using trend following and risk parity approaches Fernandes, João Pedro Asset allocation Diversificação -- Diversification Portfolio choice Risk parity Trend following Alocação de ativos Escolha de portfólio Paridade de risco Tendência - Trend |
title_short |
Asset allocation using trend following and risk parity approaches |
title_full |
Asset allocation using trend following and risk parity approaches |
title_fullStr |
Asset allocation using trend following and risk parity approaches |
title_full_unstemmed |
Asset allocation using trend following and risk parity approaches |
title_sort |
Asset allocation using trend following and risk parity approaches |
author |
Fernandes, João Pedro |
author_facet |
Fernandes, João Pedro |
author_role |
author |
dc.contributor.author.fl_str_mv |
Fernandes, João Pedro |
dc.subject.por.fl_str_mv |
Asset allocation Diversificação -- Diversification Portfolio choice Risk parity Trend following Alocação de ativos Escolha de portfólio Paridade de risco Tendência - Trend |
topic |
Asset allocation Diversificação -- Diversification Portfolio choice Risk parity Trend following Alocação de ativos Escolha de portfólio Paridade de risco Tendência - Trend |
description |
The post-crisis period revealed the ineffectiveness of many allocation strategies and the need of investors to avoid significant losses during recession and recovery periods. After a remarkable performance, in 2008, Trend Following – a strategy that takes long positions in assets with positive returns and short positions in assets with negative returns – became unsuccessful in generating constant positive returns. Generally, these strategies are constructed using futures contracts across all asset classes. Additionally, they are usually formed using weights that are inversely proportional to assets’ volatilities and have historically experienced good diversification features. However, in the period 2009-2013, the strategy became suboptimal due to the increase of pairwise correlations between and across asset classes. The increase in co-movements led to the rise of Risk Parity, a long-only allocation approach that provides equal risk contribution. Extending this approach to a long-short approach, it constructs the Trend Following Risk Parity strategy that is being studied in this dissertation. With the combination of both, it is expected that it achieves better performance compared with the strategies alone since it allows higher returns associated with Trend Following and lower volatility linked with Risk Parity. Using 38 futures contracts from 6 different asset classes over a 31-year period, risk-based portfolios show an effective improvement to traditional strategies, with some approaches performing better than others. The Trend Following Risk Parity approach achieved superior results in performance ratios, especially in high correlation periods and tougher market downturns, delivering an overall better risk-adjusted return than all other portfolios. |
publishDate |
2021 |
dc.date.none.fl_str_mv |
2021-12-14T00:00:00Z 2021-12-14 2021-10 2022-12-14T00:00:00Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/masterThesis |
format |
masterThesis |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10071/24782 TID:202887359 |
url |
http://hdl.handle.net/10071/24782 |
identifier_str_mv |
TID:202887359 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
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RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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