Adding Trend Forecasts to Risk Parity and Liquidity Allocation

Summary

The document asks how to add a tactical forecasting layer to a plain risk parity allocation. Its example is anticipating a shift in fixed income from a bullish to a bearish trend and reducing duration to hedge the portfolio. It also asks about forecasting liquidity needs or investments. The response points to Thierry Roncalli’s framework for incorporating expected returns into risk parity, which addresses tactical and strategic asset allocation.

The material is an initial question and a pointer to a reference, rather than a developed forecasting method. It gives no model specification, empirical evidence, performance results, or treatment of liquidity forecasting. Readers can take away that expected-return estimates may be incorporated into risk parity, but would need to consult the cited work and assess its assumptions before implementation. The discussion does not establish that trend, macroeconomic, sentiment, or behavioral signals reliably predict regime changes.

Key ideas

• Risk parity can be adapted to account for expected returns.
• A tactical allocation could reduce fixed income duration when forecasts point to a bearish trend.
• The response recommends consulting Thierry Roncalli’s framework for expected returns in risk parity.
• The document raises liquidity forecasting but does not provide a model or answer.

Tags

# Plain vanilla risk parity with trends forecasting power


# Plain vanilla risk parity with trends forecasting power












I have built an asset allocation model (plain vanilla risk parity) but I would like to adapt the initial asset allocation with respect to potential futures changes in the trends of the assets under management. Let's say I'd like to add a little bit of "active", staying in a quant framework. For instance, I'd like to forecast a switch in the bullish trend of fixed income securities to a bearish one and get a hedged position (reduce duration for instance) in my allocation.

Could you please suggest the main references by either academics or professionals for quant forecasting models (macro, investors' sentiment, behavioural etc.)? Any advise would be much appreciated.

I would appreciate something similar also with respect to liquidity: is there any quant model to tune my liquidity investment using forecasting methods?

## Answer by Richi Wa (score 1)

https://quant.stackexchange.com/a/9148

Thierry Roncalli adresses the issue of expected returns in risk parity in Introducing Expected Returns into Risk Parity Portfolios: A New Framework for Tactical and Strategic Asset Allocation. Maybe this preprint contains some useful ideas for you,

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.