Optimal Asset Allocation for a Portfolio of Cointegrated Commodity-ETF Pairs
15 Pages Posted: 1 Dec 2019 Last revised: 7 Dec 2019
Date Written: March 24, 2019
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: Suggested Citation