Home > Research > Publications & Outputs > Maximum diversification strategies along commod...

Links

Text available via DOI:

View graph of relations

Maximum diversification strategies along commodity risk factors

Research output: Contribution to journalJournal articlepeer-review

Published
Close
<mark>Journal publication date</mark>31/01/2018
<mark>Journal</mark>European Financial Management
Issue number1
Volume24
Number of pages26
Pages (from-to)53-78
Publication StatusPublished
Early online date7/06/17
<mark>Original language</mark>English

Abstract

Pursuing risk-based allocation across a universe of commodity assets, we find diversified risk parity (DRP) strategies to provide convincing results. DRP strives for maximum diversification along uncorrelated risk sources. A straightforward way to derive uncorrelated risk sources relies on principal components analysis (PCA). While the ensuing statistical factors can be associated with commodity sector bets, the corresponding DRP strategy entails excessive turnover because of the instability of the PCA factors. We suggest an alternative design of the DRP strategy relative to common commodity risk factors that implicitly allows for a uniform exposure to commodity risk premia.