Hierarchical risk parity using security selection based on peripheral assets of correlation-based minimum spanning trees
- Authors
- Cho, Younghwan; Song, Jae Wook
- Issue Date
- May-2023
- Publisher
- ACADEMIC PRESS INC ELSEVIER SCIENCE
- Keywords
- Portfolio management; Hierarchical risk parity; Global motion correlation; Minimum spanning tree; Security selection
- Citation
- FINANCE RESEARCH LETTERS, v.53, pp.1 - 10
- Indexed
- SSCI
SCOPUS
- Journal Title
- FINANCE RESEARCH LETTERS
- Volume
- 53
- Start Page
- 1
- End Page
- 10
- URI
- https://scholarworks.bwise.kr/hanyang/handle/2021.sw.hanyang/184869
- DOI
- 10.1016/j.frl.2022.103608
- ISSN
- 1544-6123
- Abstract
- This study proposes hierarchical risk parity portfolios using a new correlation matrix and security selection. We suggest a global motion subtracted correlation matrix, which eliminates the global motion in the cross-correlation matrix. Also, we suggest utilizing the peripheral assets of a correlation-based minimum spanning tree for security selection. The proposed portfolio strategies with security selection outperform benchmarks, showing their nature as smart beta strategies. Specifically, the full correlation with a small number and global motion subtracted correlation with a relatively large number of selected assets exhibit decent performances during the post-crisis bull markets and crisis-induced bear markets, respectively.
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