Title: Harvesting commodity styles: An integrated framework
Authors: Ana-Maria Fuertes - Cass Business School - City University London (United Kingdom) [presenting]
Adrian Fernandez-Perez - Auckland University of Technology (New Zealand)
Joelle Miffre - EDHEC Business School (France)
Abstract: A portfolio allocation framework is developed to study the benefits of style integration and to compare the effectiveness of alternative integration methods in commodity markets. The framework is flexible enough to be applicable to any asset class for either long-short, long- or short-only styles. We study the nave equal-weighted integration and sophisticated integrations where the style exposures are sample-based by utility maximization, style rotation, volatility-timing, cross-sectional pricing or principal components analysis. Considering the universe of eleven long-short commodity styles, we document that the nave integration enhances each of the individual styles in terms of their reward-to-risk tradeoff and crash risk profile. Sophisticated integrations do not challenge the nave integration and the rationale is that, while also achieving multiple-style exposures, the equal-weighting approach circumvents estimation risk and perfect-foresight bias. The findings hold after trading costs, various reformulations of the sophisticated integrations, economic sub-period analyses and data snooping tests inter alia.