Risk budget portfolios with convex Non-negative Matrix Factorization

• URL: http://arxiv.org/abs/2204.02757v2
• Date: Mon, 12 Jun 2023 11:18:14 GMT
• Title: Risk budget portfolios with convex Non-negative Matrix Factorization
• Authors: Bruno Spilak and Wolfgang Karl H\"ardle
• Abstract summary: We propose a portfolio allocation method based on risk factor budgeting using convex Nonnegative Matrix Factorization (NMF) We evaluate our method in the context of volatility targeting on two long-only global portfolios of cryptocurrencies and traditional assets.
• Score: 0.0
• License: http://creativecommons.org/licenses/by-nc-nd/4.0/
• Abstract: We propose a portfolio allocation method based on risk factor budgeting using convex Nonnegative Matrix Factorization (NMF). Unlike classical factor analysis, PCA, or ICA, NMF ensures positive factor loadings to obtain interpretable long-only portfolios. As the NMF factors represent separate sources of risk, they have a quasi-diagonal correlation matrix, promoting diversified portfolio allocations. We evaluate our method in the context of volatility targeting on two long-only global portfolios of cryptocurrencies and traditional assets. Our method outperforms classical portfolio allocations regarding diversification and presents a better risk profile than hierarchical risk parity (HRP). We assess the robustness of our findings using Monte Carlo simulation.

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