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

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  • Rad, Hossein
  • Low, Rand Kwong Yew
  • Miffre, Joëlle
  • Faff, Robert

Abstract

The commodity pricing literature advocates the design of long-short portfolios based on equal weights. Relaxing the assumption of naive diversification, this article studies the benefits of applying sophisticated weighting schemes to the construction of long-short momentum and term structure portfolios. Weighting schemes based on risk minimization and risk timing are found to dominate the naive allocation and the weighting schemes based on utility maximization. This conclusion is not challenged by concerns pertaining to transaction costs, illiquidity, data mining, sub-periods, and model parameters and robustly persists when we consider as sorting signals hedging pressure, speculative pressure and, to a lower extent, basis-momentum.

Suggested Citation

  • Rad, Hossein & Low, Rand Kwong Yew & Miffre, Joëlle & Faff, Robert, 2020. "Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 164-180.
    • Handle: RePEc:eee:empfin:v:58:y:2020:i:c:p:164-180
    DOI: 10.1016/j.jempfin.2020.05.006
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    Cited by:

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    2. Immo Stadtmüller & Benjamin R. Auer & Frank Schuhmacher, 2024. "Core-satellite investing with commodity futures momentum," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 261-287, May.
    3. Hanif, Waqas & Areola Hernandez, Jose & Troster, Victor & Kang, Sang Hoon & Yoon, Seong-Min, 2022. "Nonlinear dependence and spillovers between cryptocurrency and global/regional equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
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    6. 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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