Hierarchical Risk Parity for Portfolio Allocation in the Latin American NUAM Market
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arXiv
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| Format: | Preprint |
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2025
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| author | Ramirez-Carrillo, Gonzalo Ortiz-Mora, David Aguilar-Larrotta, Alex |
| author_facet | Ramirez-Carrillo, Gonzalo Ortiz-Mora, David Aguilar-Larrotta, Alex |
| contents | This study applies the Hierarchical Risk Parity (HRP) portfolio allocation methodology to the NUAM market, a regional holding that integrates the markets of Chile, Colombia and Peru. As one of the first empirical analyses of HRP in this newly formed Latin American context, the paper addresses a gap in the literature on portfolio construction under cross-border, emerging market conditions. HRP leverages hierarchical clustering and recursive bisection to allocate risk in a manner that is both interpretable and robust--avoiding the need to invert the covariance matrix, a common limitation in the traditional mean-variance optimization. Using daily data from 54 constituent stocks of the MSCI NUAM Index from 2019 to 2025, we compare the performance of HRP against two standard benchmarks: an equally weighted portfolio (1/N) and a maximum Sharpe ratio portfolio. Results show that while the Max Sharpe portfolio yields the highest return, the HRP portfolio delivers a smoother risk-return profile, with lower drawdowns and tracking error. These findings highlight HRP's potential as a practical and resilient asset allocation framework for investors operating in the integrated, high-volatility markets like NUAM. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2509_03712 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Hierarchical Risk Parity for Portfolio Allocation in the Latin American NUAM Market Ramirez-Carrillo, Gonzalo Ortiz-Mora, David Aguilar-Larrotta, Alex Portfolio Management This study applies the Hierarchical Risk Parity (HRP) portfolio allocation methodology to the NUAM market, a regional holding that integrates the markets of Chile, Colombia and Peru. As one of the first empirical analyses of HRP in this newly formed Latin American context, the paper addresses a gap in the literature on portfolio construction under cross-border, emerging market conditions. HRP leverages hierarchical clustering and recursive bisection to allocate risk in a manner that is both interpretable and robust--avoiding the need to invert the covariance matrix, a common limitation in the traditional mean-variance optimization. Using daily data from 54 constituent stocks of the MSCI NUAM Index from 2019 to 2025, we compare the performance of HRP against two standard benchmarks: an equally weighted portfolio (1/N) and a maximum Sharpe ratio portfolio. Results show that while the Max Sharpe portfolio yields the highest return, the HRP portfolio delivers a smoother risk-return profile, with lower drawdowns and tracking error. These findings highlight HRP's potential as a practical and resilient asset allocation framework for investors operating in the integrated, high-volatility markets like NUAM. |
| title | Hierarchical Risk Parity for Portfolio Allocation in the Latin American NUAM Market |
| topic | Portfolio Management |
| url | https://arxiv.org/abs/2509.03712 |