Commodity premia and risk management

John Hua Fan and Tingxi Zhang

Journal of Futures Markets, 2024, vol. 44, issue 7, 1097-1116

Abstract: We examine the role of risk management in the context of commodity factor premia. Stopping losses in individual commodities effectively improves the average returns of long‐short commodity premia through persistent reduction in the frequency and severity of drawdowns. The magnitude of improvement is related to the quality of the signal, commodity return volatility, and autocorrelations, as well as transaction costs. The efficacy of a stop‐loss strategy can be enhanced by dynamically calibrating loss thresholds in accordance with realized volatility, and it performs best in high conviction weighting schemes. Overall, we highlight the pivotal role of risk management beyond volatility targeting and risk‐parity in harnessing commodity risk premia.

Date: 2024
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https://doi.org/10.1002/fut.22507

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