Optimal Asset Allocation for a Portfolio of Cointegrated Commodity-ETF Pairs

15 Pages Posted: 1 Dec 2019 Last revised: 7 Dec 2019

See all articles by Alexander Joshua Michael Fish

Alexander Joshua Michael Fish

Cornell University - College of Engineering

Anant Patel

Cornell University; Cornell University - College of Engineering

Shankar Venkatraman

Cornell University - College of Engineering

Date Written: March 24, 2019

Abstract

A portfolio of commodity index-ETF pairs was constructed and its performance was compared against the Bloomberg commodity index. The portfolio was trained on data from 2011 to 2014 to determine the optimal parameters for trade-execution thresholds. Using these parameters and the optimal exposures found from optimizing the risk-adjusted expected returns, the trading strategy was tested from 2015 to 2018 with the portfolio re-balanced at the beginning of each year. Comparing the returns of the portfolio against the Bloomberg Barclays Commodities Index as a benchmark, it was found that the portfolio outperformed the benchmark in total returns and Sharpe ratio for 2015, 2017, and 2018, but it under-performed for both metrics in 2016. Performing a paired t-test on the portfolio and benchmark returns proved that the portfolio does not significantly outperform the benchmark in any given year.

Keywords: Optimization, Portfolio Management, Commodities, Pairs Trading, Financial Mathematics, Financial Engineering

JEL Classification: G11

Suggested Citation

Fish, Alexander and Patel, Anant and Venkatraman, Shankar, Optimal Asset Allocation for a Portfolio of Cointegrated Commodity-ETF Pairs (March 24, 2019). Available at SSRN: https://ssrn.com/abstract=3487540 or http://dx.doi.org/10.2139/ssrn.3487540

Alexander Fish (Contact Author)

Cornell University - College of Engineering ( email )

Ithaca, NY 14853
United States

Anant Patel

Cornell University

30-09 Broadway
Apt 3
Astoria, NY New York 11106
United States

Cornell University - College of Engineering ( email )

Ithaca, NY 14853
United States

Shankar Venkatraman

Cornell University - College of Engineering ( email )

Ithaca, NY 14853
United States

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