Leverage Aversion and the Effect of Risk Parity Strategy

In the 21st century, amid challenging capital market conditions, the demand for all-weather investment strategies has led to the concept of the risk parity strategy, which is now widely used by pension and hedge funds. This study validates the usefulness of the risk-parity strategy in the Korean capital market and suggests its practical applications. By regressing the returns of a risk parity portfolio on those of various benchmarks, statistically significant positive alphas are obtained for all benchmark cases, demonstrating the superiority of the risk parity strategy. Additionally, both the maximum and minimum returns of the matching risk parity strategy are higher than those of the benchmark strategy, confirming its practical usefulness.