Portfolio Optimization of Commodity Futures with Seasonal Components and Higher Moments
18 Pages Posted: 17 Nov 2016
Date Written: November 15, 2016
We investigate the diversiﬁcation beneﬁts of combining commodities with a traditional equity portfolio, while considering higher order statistical moments and seasonality. The literature suggests that the in-sample diversiﬁcation beneﬁts of commodities in portfolio optimization are not preserved out-of-sample. We provide an extensive in-sample and out-of-sample analysis with ten commodities and a stock index using the classical tangency mean-variance model and the maximum Omega ratio model. We show that seasonality in commodity returns should be considered, and leads to signiﬁcant excess return and increase in Sharpe ratio.
Keywords: Commodity Futures, Sieve Bootstrapping, Omega Ratio, Portfolio Optimization, Stochastic Programming
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