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Risk parity in US futures markets

Author

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  • Bernd Scherer

    (FTC Capital GmbH)

Abstract

Risk parity allocates identical percentage contribution to risk to each individual asset. In the absence of established theoretical foundations, investors and product suppliers attribute the strong historical performance of risk parity portfolios to better diversification. This is an ill-founded belief. For US futures data I show that risk parity is not about diversification, but about higher return expectations for leveraged low-risk bonds. Although this is consistent with leverage aversion, it is incompatible with consumption-based asset pricing. In contrast to past work, I use futures data instead of diversified equity and bond indices. This allows concerns raised earlier about the availability of historic implementation costs or the historic price of leverage to be sidestepped.

Suggested Citation

  • Bernd Scherer, 2012. "Risk parity in US futures markets," Journal of Asset Management, Palgrave Macmillan, vol. 13(3), pages 155-161, June.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:3:d:10.1057_jam.2012.4
    DOI: 10.1057/jam.2012.4
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    References listed on IDEAS

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