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Maximum diversification strategies along commodity risk factors


Leippold, Markus; Bernardi, Simone; Lohre, Harald (2018). Maximum diversification strategies along commodity risk factors. European Financial Management, 24(1):53-78.

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.

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.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > General Economics, Econometrics and Finance
Language:English
Date:1 January 2018
Deposited On:18 Dec 2018 14:41
Last Modified:29 Jul 2020 08:26
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:1354-7798
OA Status:Closed
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1111/eufm.12122
Related URLs:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290776 (Organisation)
Other Identification Number:merlin-id:14323

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