Journal of Risk

Risk.net

Mostly prior-free asset allocation

Sylvain Chassang

  • The author proposes a novel coherent framework for asset allocation when the past ceases to predict the future.
  • The key insight is to replace probability with game theory, and consider the performance of portfolios against an adversarial market.
  • The paper shows how to build asset allocation strategies that guarantee low drawdowns against both safe, and risky reference assets.
  • The resulting asset allocation strategies improve on classical risk-management strategies such as CPPI or volatility control.

This paper develops a prior-free version of Harry Markowitz’s efficient portfolio theory, which allows the decision maker to express their preferences with regard to risk and reward, even though they are unable to express a prior over potentially nonstationary returns. The corresponding optimal allocation strategies are admissible and interior, and they exhibit a form of momentum. Empirically, prior-free efficient allocation strategies successfully exploit the time-varying risk premiums present in historical returns.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: