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Maximum diversification strategies along commodity risk factors

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  • Simone Bernardi
  • Markus Leippold
  • Harald Lohre

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.

Suggested Citation

  • Simone Bernardi & Markus Leippold & Harald Lohre, 2018. "Maximum diversification strategies along commodity risk factors," European Financial Management, European Financial Management Association, vol. 24(1), pages 53-78, January.
    • Handle: RePEc:bla:eufman:v:24:y:2018:i:1:p:53-78
    DOI: 10.1111/eufm.12122
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    References listed on IDEAS

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    Cited by:

    1. Gilles Boevi Koumou, 2023. "Risk budgeting using a generalized diversity index," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 443-458, October.
    2. Gagnon, Marie-Hélène & Manseau, Guillaume & Power, Gabriel J., 2020. "They're back! Post-financialization diversification benefits of commodities," International Review of Financial Analysis, Elsevier, vol. 71(C).
    3. Ahn, Jung-Hyun & Six, Pierre, 2019. "A study of first generation commodity indices: Indices based on financial diversification," Finance Research Letters, Elsevier, vol. 30(C), pages 194-200.
    4. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, March.

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