How Do Portfolio Weighting Schemes Affect Commodity Futures Risk Premia?
30 Pages Posted: 4 Jun 2017
Date Written: November 1, 2016
We examine whether and to what extent successful equities investment strategies are transferrable to the commodities futures market. We investigate a total of 7 investment strategies that involve optimization and mean-variance timing techniques. To account for the unique characteristics of the commodity futures market, we propose a novel method of classification based on momentum or term structure properties in the formation of long-short portfolios in conjunction with the quantitative strategies from the equities literature. Our strategies generate significant excess returns and risk-adjusted performances as measured by the Sharpe and Sortino ratios and the maximum drawdown. We find no significant correlation between the strategies’ excess returns and common risk factors. There is no evidence that excess returns are a compensation for liquidity risk. The strategies are robust to transaction costs and choice of model parameters and exhibit stable performance across various market environments including times of financial crises.
Keywords: commodity futures, portfolio optimization, quantitative strategies, investment strategies
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation