Does Sophistication of the Weighting Scheme Enhance the Performance of Long-Short Commodity Portfolios?
43 Pages Posted: 4 Jun 2017 Last revised: 16 Sep 2020
Date Written: November 1, 2016
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: Suggested Citation