The Matrix Effective Rank: Measuring the Dimensionality of a Universe of Assets
Quantifying how diversified is a universe of assets is an open problem in quantitative finance, partly because there is no definite formula for diversificati...
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Beyond Hierarchical Risk Parity: Hierarchical Clustering-Based Risk Parity
In a previous post, I introduced the Hierarchical Risk Parity portfolio optimization algorithm1. In this post, I will present one of its variations, called ...
Hierarchical Risk Parity: Introducing Graph Theory and Machine Learning in Portfolio Optimizer
In this short post, I will introduce the Hierarchical Risk Parity portfolio optimization algorithm, initially described by Marcos Lopez de Prado1, and recen...
Correlation Matrix Stress Testing: Shrinkage Toward an Equicorrelation Matrix
Financial research has consistently shown that correlations between assets tend to increase during crises and tend to decrease during recoveries1. The recen...
Residualization of Risk Factors: Examples and Pitfalls
The most common approach to measuring portfolio (risk) factor exposures is linear regression analysis, which describes the relationship between a dependent ...