The Risk Parity Portfolio Based On Regime Switch

Under the background of severe financial market volatility,risk parity portfolio has gradually become the asset allocation strategy favored by institutional investors.Risk parity portfolio is very sensitive to inter-asset covariance matrix,so the estimation of covariance matrix will directly affect the performance of portfolio.Through long-term observation,the correlation between assets can be found to have the characteristic of regime switching.Based on the Regime Switching Dynamic Conditional Correlations(RSDCC)model to make improvements to parity portfolio risk,and Viterbi algorithm is applied to improve the effectiveness of model identification of market state.In the empirical study,the modified risk parity portfolio is constructed by using the global asset allocation method and selecting Shanghai Composite Index,Nasdaq Index,Wind Commodity Index and London Gold Spot Price Index.The empirical results show that the comprehensive performance of the portfolio is better than the traditional risk parity portfolio.