Factor-Based Commodity Investing
Factor-Based Commodity Investing January 2018 Athanasios Sakkas Assistant Professor in Finance, Southampton Business School, University of Southampton Nikolaos Tessaromatis Professor of Finance, EDHEC Business School, EDHEC-Risk Institute JEL Classification: G10, G11, G12, G23 Keywords: Commodities; Factor Premia; Momentum; Basis, Basis-Momentum, Variance Timing, Commodity Return Predictability EDHEC is one of the top five business schools in France. Its reputation is built on the high quality of its faculty and the privileged relationship with professionals that the school has cultivated since its establishment in 1906. EDHEC Business School has decided to draw on its extensive knowledge of the professional environment and has therefore focused its research on themes that satisfy the needs of professionals. EDHEC pursues an active research policy in the field of finance. EDHEC-Risk Institute carries out numerous research programmes in the areas of asset allocation and risk management in both the 2 traditional and alternative investment universes. Copyright © 2018 EDHEC Abstract A multi-factor commodity portfolio combining the high momentum, low basis and high basis- momentum commodity factor portfolios significantly, economically and statistically outperforms, widely used commodity benchmarks. We find evidence that a variance timing strategy applied to commodity factor portfolios improves the return to risk trade-off of unmanaged commodity portfolios. In contrast, dynamic commodities strategies based on commodity return prediction models provide little value added once variance timing has been applied to commodity portfolios. 1. Introduction There is growing evidence that commodity prices can be explained by a small number of priced commodity factors. Commodity portfolios exposed to commodity factors earn significant risk premiums, in addition to the premium offered by a broadly diversified commodity index.
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