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A Bayesian perspective on commodity style integration

Fuertes, A-M. ORCID: 0000-0001-6468-9845 & Zhao, N. (2023). A Bayesian perspective on commodity style integration. Journal of Commodity Markets, 30, article number 100328. doi: 10.1016/j.jcomm.2023.100328


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 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.

Publication Type: Article
Additional Information: © 2023. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Publisher Keywords: Commodity risk premia, Style integration, Long-short portfolio, Parameter estimation risk, Bayesian portfolio optimization
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
SWORD Depositor:
[thumbnail of SSRN-id4112383.pdf] Text - Accepted Version
This document is not freely accessible until 2 May 2025 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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