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Title: Risk parity strategy based on Kurtosis: Methodology and portfolio effects Authors:  Consuelo Nava - University of Turin (Italy) [presenting]
Maria Grazia Zoia - Catholic University of the Sacred Heart - Milan (Italy)
Maria Debora Braga - Bocconi University and University of Aosta Valley (Italy)
Abstract: The distinguishing feature of portfolios based on risk-parity strategy is that of allocating wealth among asset classes in such a way that each of them contributes to the portfolio volatility to the same extent. We expand the research on risk parity with a new version of the strategy which replaces the volatility of portfolio returns with portfolio kurtosis as a reference measure. According to this approach, the investor still aims, when setting up the portfolio, at disseminating equally among asset classes the responsibility for portfolio returns' dispersion but she/he is focused on the huge dispersion as evidenced by relying on the fourth moment that puts more weight on extreme values /outcomes (either positive or negative) than standard deviation does. Closed-form expressions of the assets' contributions to portfolio kurtosis are determined. Through an application on real market data, the proposed methodology of Equally Weighted Kurtosis Contribution Portfolios is compared to the classical risk parity allocation strategy based on volatility and its peculiar properties are analyzed.