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03-01-2022 | Research Article

Permutation-weighted portfolios and the efficiency of commodity futures markets

Authors: Ricardo T. Fernholz, Robert Fernholz

Published in: Annals of Finance | Issue 1/2022

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Abstract

We study the behavior of permutation-weighted portfolios, portfolios with weights that are proportional to a permutation of the current market weights. For markets with more than two assets, these portfolios are not functionally generated (except for the identity permutation), so we use rank-based methods to analyze their behavior. The reverse-wighted portfolio is the permutation-weighted portfolio with weights proportional to the market weights, but reversed by rank. We show that in a market represented by a first-order model with rank-symmetric variance parameters, the reverse-weighted portfolio will outperform the market portfolio over the long term. This result carries over to a commodity futures market with rank-based parameters similar to those of such a first-order model. In this market we find that the reverse-weighted portfolio outperforms the price-weighted market portfolio from 1977–2018.

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Title: Permutation-weighted portfolios and the efficiency of commodity futures markets
Authors: Ricardo T. Fernholz
Robert Fernholz
Publication date: 03-01-2022
Publisher: Springer Berlin Heidelberg
Published in: Annals of Finance / Issue 1/2022
Print ISSN: 1614-2446
Electronic ISSN: 1614-2454
DOI: https://doi.org/10.1007/s10436-021-00401-8

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