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B. Hood, J. Huss, R. Israelov, M. Klein: Risk Parity is Not Short Volatility (Not That There’s Anything Wrong with Short Volatility)

August 15, 2019

There have been increasingly frequent claims that risk parity strategies are hiding an implicit short volatility exposure or behave as though they are short volatility. In order to test the veracity of these claims, we simulate stylized versions of three-asset-class (equity, fixed income, and commodities) risk parity and short volatility strategies, and we compare the trading behavior and returns of each. We conclude that the two strategies’ similarities are overstated, and we find no empirical evidence to support the claimed hidden exposure.

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