TY - JOUR

T1 - Maximum diversification strategies along commodity risk factors

AU - Bernardi, Simone

AU - Leippold, Markus

AU - Lohre, Harald

PY - 2018/1/31

Y1 - 2018/1/31

N2 - 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.

AB - 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.

KW - commodity strategies

KW - diversification

KW - risk parity

KW - risk-based portfolio construction

U2 - 10.1111/eufm.12122

DO - 10.1111/eufm.12122

M3 - Journal article

AN - SCOPUS:85020432235

VL - 24

SP - 53

EP - 78

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

IS - 1

ER -