A Bayesian Perspective on Commodity Style Integration

Ana-Maria Fuertes and Nan Zhao

MPRA Paper from University Library of Munich, Germany

Abstract: Commodity style integration is appealing because by forming a unique long-short portfolio with exposure to K mildly correlated factors, a larger and more stable risk premium can be extracted than with any of the standalone styles. A key decision that a commodity style-integration investor faces at each rebalancing time is the relative weighting of the factors. We propose a Bayesian optimized style-integration (BOI) strategy with excellent out-of-sample performance. Focusing on the problem of a commodity investor that seeks exposure to the carry, hedging pressure, momentum, skewness, and basis-momentum factors, the evidence suggests that the BOI portfolio achieves better Sharpe ratios and certainty equivalent returns, among other performance metrics, than the 1/K style-weighted integrated portfolio, and a battery of sophisticated optimized integrations. The findings survive the consideration of longer estimation windows, various commodity score schemes, and alternative Bayesian priors.

Keywords: Commodity risk premia; Style integration; Long-short portfolio; Parameter estimation risk; Bayesian portfolio optimization. (search for similar items in EconPapers)
JEL-codes: C1 C11 G1 G11 G13 (search for similar items in EconPapers)
Date: 2022, Revised 2023
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Journal Article: A Bayesian perspective on commodity style integration (2023)
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