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

See all articles by Hossein Rad

Hossein Rad

University of Queensland Business School

Rand Kwong Yew Low

University of Queensland; Bond University

Joëlle Miffre

Audencia Business School

Robert W. Faff

Bond University; 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). Journal of Empirical Finance, Vol. 58, 2020, 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 ( email )

Building 37-411, Joyce Ackroyd
St Lucia
Brisbane, QLD 4122
Australia

HOME PAGE: http://researchers.uq.edu.au/researcher/9214

Joelle Miffre

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Robert W. Faff

Bond University ( email )

Gold Coast, QLD 4229
Australia

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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