Maximum diversification strategies along commodity risk factors

Bernardi, Simone and Leippold, Markus and Lohre, Harald (2018) Maximum diversification strategies along commodity risk factors. European Financial Management, 24 (1). pp. 53-78. ISSN 1354-7798

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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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Journal Article
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European Financial Management
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08 Oct 2021 15:05
Last Modified:
22 Nov 2022 10:41