The Risk Parity Approach Applied to Agricultural Commodities

Abstract

The recent years were hard for commodities, with most suffering of high losses. The uncertainty of the financial markets after the 2008 crisis has pushed in the interest of finding new way of diversification. With the Risk Parity or Equally Weighted Risk Contribution strategy, Maillard, Roncalli, and Teiletche (2008) suggested a method that maximize the diversification. These authors have applied this strategy to the volatility (standard deviation). In this chapter, the author describes how to apply Risk Parity to the Conditional Value at Risk using historical data estimation. Passing to CVaR, a coherent measure, the model can benefit from its properties with the needed assumptions. As a special case, the author has applied this method to an agricultural portfolio, compared the Risk Parity strategies with each other and with the Mean Variance and Conditional Value at Risk. An important part is the analysis of the riskiness, the diversification and the turnover. A portfolio with a certain numbers of agricultural commodities may have particular specified that an investor requires.