Hierarchical Risk Parity Using Security Selection Based on Peripheral Assets of Correlation-Based Minimum Spanning Trees

This study proposes hierarchical risk parity portfolios using a new correlation matrix and security selection. We suggest a global motion subtracted correlation matrix, which eliminates the global motion in the cross-correlation matrix. Also, we suggest utilizing the peripheral assets of a correlation-based minimum spanning tree for security selection. We discover that the portfolios with proposed security selection could outperform benchmarks. Specifically, the full correlation with a small number and global motion subtracted correlation with a relatively large number of selected assets exhibit decent performances during the post-crisis bull markets and crisis-induced bear markets, respectively