Does Sophistication of the Weighting Scheme Enhance the Performance of Long-Short Commodity Portfolios?

43 Pages Posted: 4 Jun 2017 Last revised: 10 May 2019

See all articles by Hossein Rad

Hossein Rad

University of Queensland Business School

Rand Kwong Yew Low

University of Queensland Business School

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Robert W. Faff

University of Queensland

Date Written: November 1, 2016

Abstract

This paper develops a long-short portfolio construction technique that captures the fundamentals of backwardation and contango and simultaneously deviates from the equal-weighting scheme traditionally employed in the commodity literature. We find that the sophisticated weighting schemes based on risk minimization and risk timing dominate the traditional naive equal-weight allocation and the schemes based on utility maximization. Our findings apply to the consideration of long-short portfolios based on momentum, term structure, hedging pressure, and speculative pressure. The conclusions robustly persist after accounting for transaction costs, illiquidity, data mining, various model specifications, and different sub-periods.

Keywords: long-short portfolios, equal weights, optimized weights, risk-timing weights

JEL Classification: G13, G14

Suggested Citation

Rad, Hossein and Low, Rand Kwong Yew and Miffre, Joelle and Faff, Robert W., Does Sophistication of the Weighting Scheme Enhance the Performance of Long-Short Commodity Portfolios? (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2977710 or http://dx.doi.org/10.2139/ssrn.2977710

Hossein Rad (Contact Author)

University of Queensland Business School ( email )

St Lucia
Australia

Rand Kwong Yew Low

University of Queensland Business School ( email )

Building 37-411, Joyce Ackroyd
St Lucia
Brisbane, QLD 4122
Australia
+61 7 3346 8124 (Phone)
+61 7 3346 8166 (Fax)

HOME PAGE: http://www.business.uq.edu.au/staff/details/rand-low

Joelle Miffre

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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