Turning Tail Risks into Tailwinds

Abstract

This study compares a broad range of risk models for managing multi-asset portfolios. The investment universe is extended to a range of systematic strategies with varying risk and return profiles. Focusing on risk parity portfolios, the authors show that considering tail risks can successfully reduce negative asymmetry and sharp losses. Extreme risk theory is of particular help in finding the right allocation to defensive systematic strategies in the portfolio.

TOPICS: Portfolio construction, risk management, VAR and use of alternative risk measures of trading risk, tail risks

Key Findings

• ▪ This study compares a broad range of risk models for managing multi-asset portfolios.

• ▪ The investment universe is extended to a range of systematic strategies with varying risk and return profiles.

• ▪ Focusing on risk parity portfolios, the authors show that considering tail risks can successfully reduce negative asymmetry and sharp losses.