TY - JOUR
TI - The impact of covariance misspecification in risk-based portfolios
LA - en
AU - Ardia, D.
AU - Boudt, K.
AU - Bolliger, G.
AU - Gagnon-Fleury, P.
PY - 2017
DA - .3
AB - The equal-risk-contribution, inverse-volatility weighted, maximum-diversification and minimum-variance portfolio weights are all direct functions of the estimated covariance matrix. We perform a Monte Carlo study to assess the impact of covariance matrix misspecification to these risk-based portfolios at the daily, weekly and monthly forecasting horizon. Our results show that the equal-risk-contribution and inverse-volatility weighted portfolio weights are relatively robust to covariance misspecification. In contrast, the minimum-variance portfolio weights are highly sensitive to errors in both the estimated variances and correlations, while errors in the estimated correlations can have a large effect on the weights of the maximum-diversification portfolio.
T2 - Annals of Operations Research
VL - 0
SP - 1
EP - 5
ER -