Unité mixte de recherche 7235

The Risk Parity Principle applied on a Corporate Bond Index using Duration Times Spread

Lauren Stagnol

[en]In this paper, we apply the principle of Equal Risk Contribution (ERC) to a corporate bond index, an asset class so far left behind in this literature. Specifically, we rely on the Duration Time Spread (DTS) and demonstrate that it is an coherent metric for bond risk. We construct indexes based on sector – issuer – and bond level using structured block correlation matrices, weights being inversely proportional to DTS. Our results provide evidence that applying ERC using DTS in the index design significantly improves corporate bond index risk-adjusted returns. It appears that the higher the granularity is, the higher will be the risk adjusted performance enhancements. More generally, the ERC application we present appears to be a valuable trade-off between heuristic and more complex risk-modeling based weighting schemes.[/en]

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