Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?

Hossein Rad*, Rand Kwong Yew Low, Joëlle Miffre, Robert Faff

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

Abstract

The commodity pricing literature advocates the design of long-short portfolios based on equal weights. Relaxing the assumption of naive diversification, this article studies the benefits of applying sophisticated weighting schemes to the construction of long-short momentum and term structure portfolios. Weighting schemes based on risk minimization and risk timing are found to dominate the naive allocation and the weighting schemes based on utility maximization. This conclusion is not challenged by concerns pertaining to transaction costs, illiquidity, data mining, sub-periods, and model parameters and robustly persists when we consider as sorting signals hedging pressure, speculative pressure and, to a lower extent, basis-momentum.

Original languageEnglish
Pages (from-to)164-180
Number of pages17
JournalJournal of Empirical Finance
Volume58
Early online date2 Jun 2020
DOIs
Publication statusPublished - Sep 2020

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