Asset allocation using trend following and risk parity approaches

Detalhes bibliográficos
Autor(a) principal: Fernandes, João Pedro
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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spelling 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
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