Permutation-weighted portfolios and the efficiency of commodity futures markets

Ricardo Fernholz and Robert Fernholz ()
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Robert Fernholz: Intech Investment Management, LLC

Annals of Finance, 2022, vol. 18, issue 1, No 3, 108 pages

Abstract: 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.

Keywords: Stochastic portfolio theory; Functionally generated portfolios; Market efficiency; Swap portfolios; Reverse-weighted portfolios; Permutation-weighted portfolios; First-order model; Commodity futures (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Permutation-Weighted Portfolios and the Efficiency of Commodity Futures Markets (2020)
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DOI: 10.1007/s10436-021-00401-8

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