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

Hossein Rad , Rand Low , Joelle Miffre (1) , Robert Faff

1 Audencia Business School

The article develops a long-short portfolio construction technique that captures the fundamentals of backwardation and contango present in commodity futures markets and simultaneously deviates from the equal-weighting scheme traditionally employed in the literature. The sophisticated weighting schemes based on risk minimization and risk timing are found to dominate the traditional naive allocation and the schemes based on utility maximization. The conclusion applies to both momentum and term structure portfolios and persists after accounting for transaction costs, lack of liquidity, various model specifications, and different sub-periods.

Keywords: long-short portfolios; equal weights; optimized weights; risk-timing weights

Domains: Quantitative Finance [q-fin]; Portfolio Management [q-fin.PM]

Hossein Rad, Rand Low, Joelle Miffre, Robert Faff. Does sophistication of the weighting scheme enhance the performance of long-short commodity portfolios?. Journal of Empirical Finance, 2020, ⟨10.1016/j.jempfin.2020.05.006⟩. ⟨hal-02868473⟩