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Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?

Author

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  • Hossein Rad
  • Rand Low
  • Joelle Miffre

    (Audencia Business School)

  • Robert Faff

Abstract

The article develops a long-short portfolio construction technique that captures the fundamentals of backwardation and contango present in commodity futures markets and simultaneously deviates from the equal-weighting scheme traditionally employed in the literature. The sophisticated weighting schemes based on risk minimization and risk timing are found to dominate the traditional naive allocation and the schemes based on utility maximization. The conclusion applies to both momentum and term structure portfolios and persists after accounting for transaction costs, lack of liquidity, various model specifications, and different sub-periods.

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  • Hossein Rad & Rand Low & Joelle Miffre & Robert Faff, 2020. "Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?," Post-Print hal-02868473, HAL.
    • Handle: RePEc:hal:journl:hal-02868473
    DOI: 10.1016/j.jempfin.2020.05.006
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-02868473
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    5. Ramesh Adhikari & Kyle J. Putnam & Humnath Panta, 2020. "Robust Optimization-Based Commodity Portfolio Performance," IJFS, MDPI, vol. 8(3), pages 1-16, September.

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    More about this item

    Keywords

    long-short portfolios; equal weights; optimized weights; risk-timing weights;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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