Maximum Diversification Strategies Along Commodity Risk Factors

European Financial Management, Vol. 24, Issue 1, pp. 53-78, 2018

37 Pages Posted: 8 Jul 2013 Last revised: 12 Mar 2018

See all articles by Simone Bernardi

Simone Bernardi

University of Zurich - Department of Banking and Finance

Markus Leippold

University of Zurich; Swiss Finance Institute

Harald Lohre

Robeco Quantitative Investments; Lancaster University Management School

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2016

Abstract

Pursuing risk-based allocation across a universe of commodity assets, we find diversified risk parity (DRP) strategies to provide convincing results. DRP strives for maximum diversification along uncorrelated risk sources. A straightforward way to derive uncorrelated risk sources relies on principal components analysis (PCA). While the ensuing statistical factors can be associated with commodity sector bets, the corresponding DRP strategy entails excessive turnover because of the instability of the PCA factors. We suggest an alternative design of the DRP strategy relative to common commodity risk factors that implicitly allows for a uniform exposure to commodity risk premia.

Keywords: commodity strategies, risk-based portfolio construction, risk parity, diversification

JEL Classification: G11, D81

Suggested Citation

Bernardi, Simone and Leippold, Markus and Lohre, Harald, Maximum Diversification Strategies Along Commodity Risk Factors (December 23, 2016). European Financial Management, Vol. 24, Issue 1, pp. 53-78, 2018, Available at SSRN: https://ssrn.com/abstract=2290776 or http://dx.doi.org/10.2139/ssrn.2290776

Simone Bernardi

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Markus Leippold (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Harald Lohre

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/people/harald-lohre

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