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A Bayesian Perspective on Commodity Style Integration

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  • Fuertes, Ana-Maria
  • Zhao, Nan

Abstract

Commodity style integration is appealing because by forming a unique long-short portfolio with exposure to K mildly correlated factors, a larger and more stable risk premium can be extracted than with any of the standalone styles. A key decision that a commodity style-integration investor faces at each rebalancing time is the relative weighting of the factors. We propose a Bayesian optimized style-integration (BOI) strategy with excellent out-of-sample performance. Focusing on the problem of a commodity investor that seeks exposure to the carry, hedging pressure, momentum, skewness, and basis-momentum factors, the evidence suggests that the BOI portfolio achieves better Sharpe ratios and certainty equivalent returns, among other performance metrics, than the 1/K style-weighted integrated portfolio, and a battery of sophisticated optimized integrations. The findings survive the consideration of longer estimation windows, various commodity score schemes, and alternative Bayesian priors.

Suggested Citation

  • Fuertes, Ana-Maria & Zhao, Nan, 2022. "A Bayesian Perspective on Commodity Style Integration," MPRA Paper 117831, University Library of Munich, Germany, revised 2023.
    • Handle: RePEc:pra:mprapa:117831
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    References listed on IDEAS

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    More about this item

    Keywords

    Commodity risk premia; Style integration; Long-short portfolio; Parameter estimation risk; Bayesian portfolio optimization.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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