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Permutation-weighted portfolios and the efficiency of commodity futures markets

Author

Listed:
  • Ricardo T. Fernholz

    (Claremont McKenna College)

  • Robert Fernholz

    (Intech Investment Management, LLC)

Abstract

We study the behavior of permutation-weighted portfolios, portfolios with weights that are proportional to a permutation of the current market weights. For markets with more than two assets, these portfolios are not functionally generated (except for the identity permutation), so we use rank-based methods to analyze their behavior. The reverse-wighted portfolio is the permutation-weighted portfolio with weights proportional to the market weights, but reversed by rank. We show that in a market represented by a first-order model with rank-symmetric variance parameters, the reverse-weighted portfolio will outperform the market portfolio over the long term. This result carries over to a commodity futures market with rank-based parameters similar to those of such a first-order model. In this market we find that the reverse-weighted portfolio outperforms the price-weighted market portfolio from 1977–2018.

Suggested Citation

  • Ricardo T. Fernholz & Robert Fernholz, 2022. "Permutation-weighted portfolios and the efficiency of commodity futures markets," Annals of Finance, Springer, vol. 18(1), pages 81-108, March.
    • Handle: RePEc:kap:annfin:v:18:y:2022:i:1:d:10.1007_s10436-021-00401-8
    DOI: 10.1007/s10436-021-00401-8
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    References listed on IDEAS

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    1. Alexander Vervuurt & Ioannis Karatzas, 2015. "Diversity-Weighted Portfolios with Negative Parameter," Papers 1504.01026, arXiv.org, revised Jul 2015.
    2. Karatzas, Ioannis & Ruf, Johannes, 2017. "Trading strategies generated by Lyapunov functions," LSE Research Online Documents on Economics 69177, London School of Economics and Political Science, LSE Library.
    3. Banner, Adrian D. & Ghomrasni, Raouf, 2008. "Local times of ranked continuous semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 118(7), pages 1244-1253, July.
    4. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
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    More about this item

    Keywords

    Stochastic portfolio theory; Functionally generated portfolios; Market efficiency; Swap portfolios; Reverse-weighted portfolios; Permutation-weighted portfolios; First-order model; Commodity futures;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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