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Annals of Operations Research

, Volume 266, Issue 1–2, pp 199–221 | Cite as

Robust risk budgeting

  • Michalis Kapsos
  • Nicos Christofides
  • Berc Rustem
Analytical Models for Financial Modeling and Risk Management

Abstract

Risk based portfolio construction and particular risk parity or equally weighted risk contribution became popular among practitioners. These approaches focus only on risk and are agnostic with respect to the expected returns. In this paper, we consider risk budgeting; a generalization of risk parity. We propose an alternative formulation that is more efficient computationally. We introduce the robust risk budgeting, a robust variant of the standard risk budgeting that deals with the uncertainty in the input parameters. We show that the problem remains tractable under different types of uncertainty. We evaluate the proposed framework on real data and we observe a positive premium associated with the robust variant.

Keywords

Robust Risk Parity Budgeting Contribution 

Notes

Acknowledgements

The authors would like to thank Dr. G. A. Hanasusanto for helpful discussions regarding Appendix A. They also acknowledge partial support of the EPSRC (EP/I014640/1) for the third author and thank the anonymous referees for the comments and suggestions.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of ComputingImperial College of Science, Technology and MedicineLondonUK
  2. 2.Imperial College of Science, Technology and MedicineLondonUK

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