Maximum diversification strategies along commodity risk factors |
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Authors: | Simone Bernardi Markus Leippold Harald Lohre |
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Affiliation: | 1. University of Zurich, Department of Banking and Finance, 8032 Zurich, Switzerland;2. Invesco Quantitative Strategies, 60322 Frankfurt am Main, Germany;3. Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School, Bailrigg, Lancaster LA1 4YX, United Kingdom |
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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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Keywords: | commodity strategies diversification risk‐based portfolio construction risk parity |
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