EDHEC-Risk Institute and Lyxor are launching a three-year research chair entitled “Risk Allocation Solutions” to develop academic insights that can be used towards the design of high-performance multi-asset investment solutions, based on specific investor needs.
Year one will focus on the next generation of risk parity, which may suffer from one major shortcoming, namely the fact that it is not explicitly sensitive to changes in economic conditions.
To find optimal ways to allocate risk budgets in investors’ portfolio construction, EDHEC-Risk Institute will in particular develop a dynamic risk allocation approach through three major topics:
• Extending standard risk budgeting techniques to time-varying equity and bond volatility levels;
• Extending standard risk budgeting techniques to downside risk measures with an asymmetric response to decreases in bond yield levels;
• Extending standard risk budgeting techniques to mean-reverting risk premia for equity and bond markets.
The chair will involve a research team led by Lionel Martellini, scientific director of EDHEC-Risk Institute, with Vincent Milhau, deputy scientific director. Nicolas Gaussel, chief investment officer of Lyxor, and Thierry Roncalli, head of quantitative research at Lyxor, will participate in the scientific committee of the research chair.
Roncalli says: “The risk parity approach colours many of the investment strategies on equities, bonds and multi-asset classes in Lyxor. Extending the risk parity approach by taking into account economic changes and the dynamics of risk premia is today a challenge to better manage multi-asset portfolios. At Lyxor, we are happy to collaborate with EDHEC-Risk Institute on the development of these investment solutions, which will bring our clients real added-value.”
Martellini says: “In the face of recent crises, asset allocation decisions appear as the main source of added value by the investment industry. With the support of Lyxor Asset Management, we very much look forward to advancing research in the different areas covered by this new research chair and assessing the superiority in various economic regimes of conditional risk parity strategies with respect to standard static risk parity techniques.”