Risk Parity in the Brazilian Market

Economics Bulletin, Volume 37, Issue 3, pages 1555-1566

13 Pages Posted: 19 Jul 2017

See all articles by Pierre de Souza

Pierre de Souza

Getulio Vargas Foundation (FGV), Sao Paulo School of Business Administration, Students

Tiago Filomena

Universidade Federal do Rio Grande do Sul (UFRGS)

João Caldeira

Universidade Federal de Santa Catarina & CNPq

Denis Borenstein

Federal University of Rio Grande do Sul (UFRGS/PPGA), Management School

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS)

Date Written: July 8, 2017

Abstract

Using sectorial indices of the Brazilian market, we compare the portfolio optimization approach known as risk parity with minimum variance and equally weighted approaches. We apply various estimators for the covariance matrix to each portfolio strategy, since portfolio variance is considered as risk measure. Empirical results demonstrate that the risk parity approach provides more diversified portfolios and stable weights in the out-of-sample than the other two approaches, thereby avoiding the dangers of excessive concentration and reducing transaction costs. Furthermore, the results demonstrate that different estimators of the covariance matrix had little influence on the results obtained through the risk parity approach.

Keywords: risk parity, brazilian market, covariance matrix

JEL Classification: G11, C44, C61

Suggested Citation

de Souza, Pierre and Filomena, Tiago and Caldeira, João and Borenstein, Denis and Righi, Marcelo, Risk Parity in the Brazilian Market (July 8, 2017). Economics Bulletin, Volume 37, Issue 3, pages 1555-1566 , Available at SSRN: https://ssrn.com/abstract=3001878 or http://dx.doi.org/10.2139/ssrn.3001878

Pierre De Souza (Contact Author)

Getulio Vargas Foundation (FGV), Sao Paulo School of Business Administration, Students ( email )

Sao Paulo
Brazil

Tiago Filomena

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Av. Carlos Gomes 1111
Porto Alegre, Rio Grande do Sul 90480-004
Brazil

João Caldeira

Universidade Federal de Santa Catarina & CNPq ( email )

R. Eng. Agronômico Andrei Cristian Ferreira, s/n
Florianópolis, SC Rio Grande do Sul 90480-004
Brazil

Denis Borenstein

Federal University of Rio Grande do Sul (UFRGS/PPGA), Management School ( email )

Rua Washington Luiz, 855. Centro
Porto Alegre - RS, 90010-460
Brazil

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Washington Luis, 855
Porto Alegre, Rio Grande do Sul 90010-460
Brazil

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