Risk-Based Commodity Investing


Empirical Capital Market Research, Risk & Optimization

Bernardi, S., Leippold, M., Lohre, H.


  • Commodity strategies
  • Risk parity
  • Risk-based portfolio construction


Pursuing risk-based allocation across a universe of commodity assets, we find two alternative notions of risk parity to provide convincing results, diversified risk parity (DRP) and principal risk parity (PRP). DRP strives for maximum diversification along the uncorrelated risk sources embedded in the underlying commodities, while PRP budgets risk proportional to the risk source’s relevance in terms of their variance. These strategies are characterized by concentrated allocations that are actively adjusted to changes in the underlying risk structure. We also document competing risk-based allocation techniques to be rather similar to the 1/N-strategy or market indices in picking on concentrated market risk. Finally, we demonstrate how to enhance given risk-based allocation strategies by means of common commodity anomalies while preserving a meaningful degree of diversification.

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