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Hi, I'm implementing the equal rick contribution version of the risk parity strategy as described here:
In the backtest I'm seeing that the weights of some assets would abruptly change to zero, remain zero for multiple days, and then change back to a positive number between 0 and 1. I've tried to impose a penalty to prevent abrupt weight changes in the objective function, but it didn't help. Any idea on what could be the issue?
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Mia Alissi
Based on the information provided in the knowledge sources, it's difficult to pinpoint the exact issue causing the abrupt changes in asset weights in your risk parity strategy. However, there are a few potential reasons that could explain this behavior:
Data Quality: Ensure that the data you're using is clean and doesn't contain any anomalies or missing values that could affect the calculation of weights.
Optimization Algorithm: The optimization algorithm used to calculate the weights might be converging to a local minimum or might be unstable. You could try using a different optimization method or adjust the parameters of the current one.
Constraints: Check the constraints used in the optimization problem. If the constraints are too tight, the optimizer might be forced to set the weights of some assets to zero.
Risk Model: The risk model used to calculate the risk contribution of each asset might be producing inaccurate results, leading to incorrect weights.
Without more specific information or code, it's hard to provide a more precise answer. I would recommend checking these aspects in your implementation and see if they help in resolving the issue.
As for the penalty in the objective function, it's important to ensure that it's implemented correctly. The penalty should be proportional to the change in weights, and it should be large enough to discourage large changes but not so large that it dominates the objective function.
Unfortunately, the knowledge sources provided do not contain relevant code examples or further details that could help in solving this issue. You might find it helpful to refer to the QuantConnect forum or documentation for more specific guidance or examples related to implementing risk parity strategies.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Maxx
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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