Parity Model Research Articles

Risk parity: An alternative formulation for risk-averse stochastic optimization in presence of heavy-tailed distribution of losses

The concept of Risk Parity (or Equal Risk Contribution), which has been widely used in financial portfolio management, aims at explicitly enforcing diversification in a portfolio by ensuring equal contribution from each asset to the total volatility. While the Risk Parity condition has a straightforward use case in finance, several other application areas can be found in engineering and operations research. In these settings, the Risk Parity condition can be interpreted as enforcing the fairness of a decision or as a way to balance between a number of candidate solutions. In this paper, we consider Risk Parity in conjunction with modern risk-averse stochastic optimization (namely coherent measures of risk), study a generalized Risk Parity model, and propose a combined two-stage diversification-risk framework. We also introduce a bi-level formulation in a case when hierarchical decision-making is enforced. An approach to reformulate the Risk Parity problem as second-order cone programming is also proposed. We assess the performance of the proposed models based on a case study in hazardous materials transportation. The results show their effectiveness in terms of fairness and risk equity for decision-making under uncertainty with heavy-tailed distribution of losses.

ApproxIFER: A Model-Agnostic Approach to Resilient and Robust Prediction Serving Systems

Due to the surge of cloud-assisted AI services, the problem of designing resilient prediction serving systems that can effectively cope with stragglers and minimize response delays has attracted much interest. The common approach for tackling this problem is replication which assigns the same prediction task to multiple workers. This approach, however, is inefficient and incurs significant resource overheads. Hence, a learning-based approach known as parity model (ParM) has been recently proposed which learns models that can generate ``parities’’ for a group of predictions to reconstruct the predictions of the slow/failed workers. While this learning-based approach is more resource-efficient than replication, it is tailored to the specific model hosted by the cloud and is particularly suitable for a small number of queries (typically less than four) and tolerating very few stragglers (mostly one). Moreover, ParM does not handle Byzantine adversarial workers. We propose a different approach, named Approximate Coded Inference (ApproxIFER), that does not require training any parity models, hence it is agnostic to the model hosted by the cloud and can be readily applied to different data domains and model architectures. Compared with earlier works, ApproxIFER can handle a general number of stragglers and scales significantly better with the number of queries. Furthermore, ApproxIFER is robust against Byzantine workers. Our extensive experiments on a large number of datasets and model architectures show significant degraded mode accuracy improvement by up to 58% over ParM.

A COINTEGRATION ANALYSIS FOR THE VALIDITY OF PURCHASING POWER PARITY: EVIDENCE FROM MIDDLE EAST COUNTRIES

This paper examines the validity of Purchasing Power Parity between Jordan and its major trading partners namely, Turkey, Qatar, Iraq, United Arab Emirates and Saudi Arabia. Unit root tests, Johansen cointegration test were employed to test the data covering the period of 2000Q1-2020Q4. The unit root tests demonstrated that all variables are integrated of order one. The results of cointegration tests showed that there exists a cointegrating relationship between exchange rate, domestic and foreign price levels for the selected countries does have a cointegration relationship. This suggests that whenever there is a deviation from the equilibrium cointegrating relationship, exchange rate interacts in a dynamic fashion in adjusting to restore long-run equilibrium. As a conclusion, these results provide evidence on Purchasing Power Parity model hold in the long run and the Jordanian economy is integrated with these countries.

Do sentiment indices always improve the prediction accuracy of exchange rates?

AbstractThis study aims to improve the prediction accuracy of the exchange rate model by changing how indices that capture market sentiment are constructed. We construct the sentiment indices (SIs) for the Japanese and American markets using the Google search volume index (SVI) for financial terms listed in the Japanese dictionary. For these SVIs, we select keywords based on the correlation between weekly changes in the yen–dollar rate and the SVI. We use 30, 20, and 10 keywords that are replaced at three different frequencies: 3 months, 6 weeks, and weekly. The training period is from January 2013 to June 2015, and the forecast period is from July 2015 to December 2017. We perform a rolling regression, which keeps the length of the reference period constant at 2 and a half years, based on the interest rate parity and autoregressive models for the predictions. We compare the prediction accuracy using the mean squared prediction error, Clark and West's tests of equal predictive accuracy, and the direction of change test. When the SIs are updated every 3 months and 6 weeks, neither the interest rate parity model nor the autoregressive model shows improved prediction accuracy, even if the SI is added. However, when the SIs are updated weekly, prediction accuracy improves in both the interest rate parity and the autoregressive models as the number of words used to construct the SI increases. We conclude that frequently updated SIs can improve the short‐term prediction accuracy, while SIs updated less frequently may not.

A new assessment of economic integration in East Asia: Application of an industry-specific G-PPP model

It is well known that intra-industry trade and cross-border production networks have promoted economic growth and regional integration in East Asia. However, regional supply and production chains may have been formed differently across industries, reflecting different degrees and a different scope of regional economic linkages at an industry level. This paper makes a threefold contribution. First, to assess industry-level differences, this study adopts the generalized purchasing power parity (G-PPP) model using industry-specific producer prices. Second, the momentum threshold autoregressive (M-TAR) model is employed to allow for possible nonlinearity arising from the dynamic nature of regional economic growth and development. Third, the Granger causality test is also conducted to assess whether regional economies have autonomously integrated. The empirical results reveal that economic integration has progressed more autonomously in the electrical industry, as well as in the transportation equipment industry, as China and the ASEAN countries have become the final destination markets for finished products in these two industries.

Stock Portfolio Optimization Using a Combined Approach of Relative Robust Risk Parity

Risk parity is perceived as one of the stock portfolio selection models that have received a lot of attention since the US financial crisis in 2008. The philosophy of this model is to allocate the same amount of portfolio risk between the constituent assets. In the present study, the combined portfolio selection model of relative robust risk parity is introduced, which uses the worst-case scenario approach on the covariance matrix parameter appearing in the robust risk model in portfolio robustness. According to historical data, several scenarios are considered for the covariance matrix. The objective function value of the hybrid model for each portfolio (feasible point) is the worst result (with most volatility) among the set of scenarios. Finally, the model selects a portfolio for which the worst possible result has the least relative volatility. The research portfolio consists of 8 industries from Tehran Stock Exchange in the period 2011 to 2020. This portfolio has a higher Sharpe ratio than conventional models of mean-variance and weight parity, and is more resilient to market declines than the two models and produces less loss. Therefore, risk-averse investors are advised to use this stock portfolio selection model as a cover to face severe market declines.

Contributions of Preterm Delivery to Cardiovascular Disease Risk Prediction in Women.

Background: Preterm delivery is associated with a 1.4- to 2-fold increased risk of cardiovascular disease (CVD), but inclusion of preterm delivery in CVD risk prediction algorithms has not been tested. We evaluated whether including preterm delivery and parity in CVD risk scores improved identification of women at high risk versus scores based on traditional risk factors. Methods: We predicted 10-year CVD risk using 119,587 observations contributed by 76,512 women ≥40 years of age and 20-year CVD risk with 72,533 women ≥40 years of age and 72,872 women ≥30 years of age from the Nurses' Health Study II. Cox proportional hazards models were fit with established CVD risk factors (Model 1) and established risk factors plus preterm delivery and parity (Model 2). We evaluated model fit, calibration, discrimination, and risk reclassification. Results: Very preterm delivery (<32 weeks) was associated with CVD in all 10- and 20-year models that included the established CVD risk factors (e.g., hazard ratio: 1.61, 95% confidence interval: 1.19 to 2.20 in 10-year risk model). Model 2 had improved fit relative to Model 1, but discrimination was not improved in Model 2 based on the C-difference or net reclassification index. Similar models for 20-year CVD risk prediction at age ≥30 years indicated improved discrimination when including preterm delivery and parity. Conclusions: Incorporating preterm delivery and parity into CVD risk scores appears most useful when women are young, before they develop established CVD risk factors. Observed improvements in risk prediction were small and warrant further investigation to confirm our findings and assess utility in a clinical setting.

A Revisit on the Validity of the Uncovered Interest Rate Parity-Evidence from Time-Varying Parameter Models

ABSTRACT This paper develops two time-varying parameter uncovered interest parity (TVP-UIP) models and studies their validity in both developed and emerging countries. Compared to the traditional models, TVP-UIP models can successfully capture dynamic relationships and help to explain the UIP puzzle. Empirical results show that the coefficients vary substantially over time and the UIP relationship can be regarded as a dynamic equilibrium process especially in emerging economies. The UIP hypothesis holds in several periods and can be significantly affected by specific major events, such as the financial crises and the recovery policies in response to it, or the US monetary policy changes. The time-varying risk premium attracts great concern in the literature but only plays a limited role in this case. Moreover, the failure of UIP in some periods can be attributable to the persistence inherent in the data, which leads to a long-lasting re-establishment of the UIP relationship after a shock.

Casimir Effect for Fermion Condensate in Conical Rings

The fermion condensate (FC) is investigated for a (2+1)-dimensional massive fermionic field confined on a truncated cone with an arbitrary planar angle deficit and threaded by a magnetic flux. Different combinations of the boundary conditions are imposed on the edges of the cone. They include the bag boundary condition as a special case. By using the generalized Abel-Plana-type summation formula for the series over the eigenvalues of the radial quantum number, the edge-induced contributions in the FC are explicitly extracted. The FC is an even periodic function of the magnetic flux with the period equal to the flux quantum. Depending on the boundary conditions, the condensate can be either positive or negative. For a massless field the FC in the boundary-free conical geometry vanishes and the nonzero contributions are purely edge-induced effects. This provides a mechanism for time-reversal symmetry breaking in the absence of magnetic fields. Combining the results for the fields corresponding to two inequivalent irreducible representations of the Clifford algebra, the FC is investigated in the parity and time-reversal symmetric fermionic models and applications are discussed for graphitic cones.

Risk Parity: The Democratization of Risk in Asset Allocation

The risk parity investment model for asset allocation offers an alternative to the mean–variance framework. The fundamental idea is that the allocation to different asset classes should not be based on an optimization that targets a specific return with a minimal level of risk but, rather, should generate a portfolio in which the contribution to portfolio risk of each asset class is equal, regardless of its expected returns. In this article, the authors explain the fundamentals of the risk parity investment model and the variants in risk parity strategies due to the selection of the asset classes to be included in the portfolio, the choice of the risk metric, the portfolio risk target, how to obtain leverage, associated leverage, whether the selection of the specific investments within an asset class is made using an active or passive approach, and the tactical risk allocation strategy. In addition to describing the practical aspects of implementing risk parity strategies, the authors identify the various shortcomings of the model and some extensions of the basic risk parity model that attempt to address some of the issues identified by the model’s critics. TOPICS:Portfolio theory, portfolio construction, risk management, performance measurement Key Findings ▪ Unlike mean–variance optimization, a risk parity strategy allocates across asset classes such that each asset class contributes equally to portfolio risk, regardless of its expected returns. ▪ In practice, there are variants of the risk parity strategy due to choices made by the portfolio manager, such as selection of the asset classes, risk measure, targeted volatility, degree of leverage, asset selection using active or passive approach, and tactical risk allocation strategy. ▪ The performance of the risk parity strategy has varied, with critics of the strategy identifying theoretical and practical implementation issues.

Ability parity model for optimal fund allocation: Evidence from China's mutual fund markets

We propose in this article a novel ability parity model for optimal fund allocation. Compared with the traditional portfolio selection methods which directly work on asset returns and/or risk (volatility), the proposed ability parity method focuses mainly on the allocation between the stock selection ability and market timing ability of fund managers, which essentially determines fund performance (Fama, 1972). Using the data of China's mutual fund markets, we find strong and robust evidence that the proposed ability parity model delivers significantly higher return, skewness, and Sharpe ratio than traditional models and the benchmark index, while having volatilities comparable with traditional models.

Climate finance activities of the multilateral development banks, emphasizing the role of the European Investment Bank in this regard

Regional disparities have always been present in the history of the European Union that has become more and more significant and intense on the occasion of the continuous enlargements of the integration. The European Investment Bank (EIB) as a policy driven development bank of the European Union plays a crucial role in reducing these regional disparities and fostering the social and territorial cohesion of the union by providing funds at favourable terms. The EIB, on the path of considerable metamorphosis, is being transformed to a so called climate or green bank, having simultaneously two task to fulfil, namely to strengthen the European Union’s position on the multi-polar global market and secure a just transition for those regions that are mostly hit by the measures taken for a climate-friendly and environmentally sustainable economy. All of the multilateral development banks following the parity and disparity models place great emphasis upon climate finance to contribute to sustainable economic growth, increasing employment and a heathy planet. The research covers the period of time between 2015 and 2025.

Uncovered Interest Rate Parity Models in a Dynamic Stochastic General Equilibrium Framework

Uncovered Interest Rate Parity Models in a Dynamic Stochastic General Equilibrium Framework

On the Stability of Portfolio Selection Models

One of the main issues in portfolio selection models consists in assessing the effect of the estimation errors of the parameters required by the models on the quality of the selected portfolios. Several studies have been devoted to this topic for the minimum variance and for several other minimum risk models. However, no sensitivity analysis seems to have been reported for the recent popular Risk Parity diversification approach, nor for other portfolio selection models requiring maximum gain-risk ratios. Based on artificial and real-world data, we provide here empirical evidence showing that the Risk Parity model is always the most stable one in all the cases analyzed. Furthermore, the minimum risk models are typically more stable than the maximum gain-risk models, with the minimum variance model often being the preferable one.

On the stability of portfolio selection models

Abstract One of the main issues in portfolio selection models consists in assessing the effect of the estimation errors of the parameters required by the models on the quality of the selected portfolios. Several studies have been devoted to this topic for the minimum variance and for several other minimum risk models. However, no sensitivity analysis seems to have been reported for the recent popular Risk Parity diversification approach, nor for other portfolio selection models requiring maximum gain–risk ratios. Based on artificial and real-world data, we provide here empirical evidence showing that the Risk Parity model is always the most stable one in all the cases analyzed with respect to the portfolio composition. Furthermore, the minimum risk models are typically more stable than the maximum gain–risk models, with the minimum variance model often being the preferable one. The Risk Parity model seems to be the most stable one also with respect to profitability when measured by the Sharpe ratio. However, the maximum gain–risk models, although quite sensitive to the input data, generally appear to attain better profitability results.

Risk Return Trade-Off in Relaxed Risk Parity Portfolio Optimization

This paper formulates a relaxed risk parity optimization model to control the balance of risk parity violation against the total portfolio performance. Risk parity has been criticized as being overly conservative and it is improved by re-introducing the asset expected returns into the model and permitting the portfolio to violate the risk parity condition. This paper proposes the incorporation of an explicit target return goal with an intuitive target return approach into a second-order-cone model of a risk parity optimization. When the target return is greater than risk parity return, a violation to risk parity allocations occurs that is controlled using a computational construct to obtain near-risk parity portfolios to retain as much risk parity-like traits as possible. This model is used to demonstrate empirically that higher returns can be achieved than risk parity without the risk contributions deviating dramatically from the risk parity allocations. Furthermore, this study reveals that the relaxed risk parity model exhibits advantageous traits of robustness to expected returns, which should not deter the use of expected returns in risk parity model.

ANALISIS PENERAPAN MODEL PURCHASING POWER PARITY UNTUK MEMPREDIKSI NILAI TUKAR RUPIAH TERHADAP US DOLLAR (Periode Januari 2016 – Desember 2018)

ABSTRACT&#x0D; &#x0D; This study aims to test the ability of the purchasing power parity model used to predict the exchange rate of the rupiah against the US dollar based on differences in inflation in the two countries. Determination of the sample in this study using purposive sampling method by time series per month during the period January 2016 - December 2018 as many as 36 months. The results of this study are that first, the difference in inflation rates in Indonesia and the United States has a significant effect on changes in the US Dollar exchange rate. Second, the purchasing power parity model is still feasible to be used to predict the rupiah exchange rate against the US dollar. These results are shown by the significant effect of differences in inflation in the two countries on changes in exchange rates, supported by the regression results of purchasing power parity that meet the requirements of the assumption test.&#x0D; &#x0D; Keywords: Purchasing Power Parity, Rupiah, Dollar, Inflation

Saving Markowitz: A Risk Parity Approach Based on the Cauchy Interlacing Theorem

It is well known that Markowitz Portfolio Optimization often leads to unreasonable and unbalanced portfolios that are optimal in-sample but perform very poorly out-of-sample. There is a strong relationship between these poor returns and the fact that covariance matrices that are used within the Markowitz framework are degenerated and ill-posed, leading to unstable results by inverting them, as a consequence of very small eigenvalues. In this paper we circumvent this problem in two steps: the enhancement of traditional risk parity techniques, which consider only volatility, aiming to avoid matrix inversions (including the widespread Naive Risk Parity model) within the Markowitz framework; the preservation of the correlation structure, as much as possible, aiming to isolate a healthy portion of the correlation matrix, that can be inverted without generating unstable and risky portfolios, aiming to rescue the original Markowitz framework, by means of using the Cauchy Interlacing Theorem. Using Brazilian and US market data, we show that the discussed framework enables one to build portfolios that outperform the traditional and the newest risk parity techniques.

A robust framework for risk parity portfolios

We propose a robust formulation of the traditional risk parity problem by introducing an uncertainty structure specifically tailored to capture the intricacies of risk parity. Typical minimum variance portfolios attempt to introduce robustness by computing the worst-case estimate of the risk measure, which is not intuitive for risk parity. Instead, our motivation is to shield the risk parity portfolio against noise in the estimated asset risk contributions. Thus, we present a novel robust risk parity model that introduces robustness around both the overall portfolio risk and the assets’ marginal risk contributions. The proposed robust model is highly tractable and is able to retain the same level of complexity as the original problem. We provide a general procedure by which to create an uncertainty structure around the asset covariance matrix. We quantify this uncertainty as a perturbation on the nominal covariance estimate, which allows us to intuitively embed robustness during optimization. We then propose a specific procedure to construct a robust risk parity portfolio through a factor model of asset returns. Computational experiments show that the robust formulation yields a higher risk-adjusted rate of return than the nominal model while maintaining a sufficiently risk-diverse portfolio.

THE MODELS OF WORK-LIFE BALANCE IN NORWAY AT THE END OF THE XXth CENTURY – THE BEGINNING OF THE XXIst CENTURY IN THE CONTEXT OF GENDER EQUALITY

The aim of the research is to describe, to analyse and to compare different models of the work-life balance, which were implemented in Norway to remove the gender asymmetry at the end of the XXth century – the beginning of the XXIst century. The research methodology is based on the principles of historicism, systemicity and interdisciplinarity. The following methods have been used while carrying out the research: general scientific (analysis and synthesis, induction and deduction, analogy, generalization) and specially-historical (historiographical analysis, retrospective, historical-comparative). The gender approach, which is aimed to critically analyse the processes of constructing, interiorization and reproducing social representations of “masculine” and “feminine”, as well as the peculiarities of the activity and interaction of men and women in various spheres of life through the prism of gender hierarchy, has been applied. The scientific novelty of the research consists in comprehending models of work-life balance in Norway in the context of gender equality. The Conclusions. During the end of the XXth century – the beginning of the XXIst century the three main models of work-life balance were implemented in Norway – the universal breadwinner, the universal caregiver and the caregiver parity. Norway, in contrast to many other European countries, offers its citizens a wide range of models of work-life balance. This kind of policy has its advantages and disadvantages, because the “freedom of choice” is often a smokescreen behind which there is a patriarchal structure reproduction. In particular, the “cash-for-care” system, which is the essential part of caregiver parity model, is based on the patriarchal ideology. The universal breadwinner model, which is the most popular among the Norwegians, does not promote gender equality as well, because it still puts the main part of caregiving on women. At the same time at the beginning of the XXIst century the dilemma of choosing a model of work-life balance obtained the intersectional connotation due to the large number of immigrants-representatives of other ethnic groups, cultures, and religions.