Meeting on 10/29/17 at 1pm, San Francisco

Our next meeting is scheduled for 10/29/17 (Sunday) at 1pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be starting a discussion on risk parity. See here for paper.

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Introducing Expected Returns into Risk Parity Portfolios: A New Framework for Asset Allocation

Abstract

Risk parity is an allocation method used to build diversified portfolios that does not rely on any assumptions of expected returns, thus placing risk management at the heart of the strategy. This explains why risk parity became a popular investment model after the global financial crisis in 2008. However, risk parity has also been criticized because it focuses on managing risk concentration rather than portfolio performance, and is therefore seen as being closer to passive management than active management. In this article, we show how to introduce assumptions of expected returns into risk parity portfolios. To do this, we consider a generalized risk measure that takes into account both the portfolio return and volatility. However, the trade-off between performance and volatility contributions creates some difficulty, while the risk budgeting problem must be clearly defined. After deriving the theoretical properties of such risk budgeting portfolios, we apply this new model to asset allocation. First, we consider long-term investment policy and the determination of strategic asset allocation. We then consider dynamic allocation and show how to build risk parity funds that depend on expected returns.

“Introducing Expected Returns into Risk Parity Portfolios: A New Framework for Asset Allocation.” Thierry Roncalli, Amundi Asset Management; University of Evry,  April 2014. See here for paper.

Meeting on 10/15/17 at 1pm, San Francisco

Our next meeting is scheduled for 10/15/17 (Sunday) at 1pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be continuing our exploration of liquidity risk premia by discussing another approach. See here for paper.

Liquidity- Another Look

From abstract:

“A portfolio’s liquidity depends not only on the liquidity of its holdings but also on its diversification. We propose simple, theoretically motivated measures of portfolio liquidity and diversification. We also develop an equilibrium model relating portfolio liquidity to fund size, expense ratio, and turnover. As the model predicts, mutual funds with less liquid portfolios have smaller size, higher expense ratios, and lower turnover. The model also yields additional predictions that we verify empirically: larger funds are cheaper, funds that trade less are larger and cheaper, and funds that are too big perform worse. We also find that mutual fund portfolios have become more liquid because both components of diversification, coverage and balance, have trended upward.”

Portfolio Liquidity and Diversification: Theory and Evidence.“, 2 Aug 2017 , Lubos Pastor (University of Chicago – Booth School of Business), Robert F. Stambaugh (University of Pennsylvania – The Wharton School), Lucian A. Taylor (University of Pennsylvania – The Wharton School)

See here.

Meeting on 10/1/17 at 1pm, San Francisco

Our next meeting is scheduled for 10/1/17 (Sunday) at 1pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on asset pricing with liquidity premia. See here for paper.

Asset pricing with liquidity risk

Abstract. This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidity adjusted capital asset pricing model, a security’s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security’s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity.

“Asset pricing with liquidity risk.” Viral V. Acharya, Lasse Heje Pedersen, London Business School, Regent’s Park, London, NW1 4SA, UK, June 2004  See here.

Meeting on 9/17/17 at 10am, San Francisco

Our next meeting is scheduled for 9/17/17 (Sunday) at 10 am in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on combined momentum and mean reversion strategies. See here for paper.