Boston QWAFAFEW Meeting: Tuesday, 17 Nov 2015 Incorporating Commodities into a Multi-Asset Class Risk Model – T.J Blackburn

Next Boston QWAFAFEW Meeting: Tuesday, 17 Nov 2015


Time: 6:15 PM sharpe

3rd Floor of the Tennis & Racquet Club, 939 Boylston Street



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Incorporating Commodities into a

Multi-Asset Class Risk Model



A QWAFAFEW discussion led by:

T.J Blackburn




Many institutional investors have begun to hold passive positions in commodities as part of their portfolio. Commodities are presumed to be a diversifying asset with behavior quite different from equities or traditional fixed income securities.  This may be attractive to some investors but is problematic from a risk management perspective.  On the one hand, we would like explain as much as possible of this behavior, but we must also keep any models of risk sufficiently parsimonious to be statistically stable.  The major groups of commodities such as agriculture and metals have behaviors quite different from one another but have obvious linkages to equities of companies whose business relates to the respective commodities. This presentation will cover a Northfield research project that has led to a new two-step approach to estimating risk factor exposures for a wide range of commodity contracts. In the first step, a principal component analysis is performed to find the underlying factors which drive commodity returns. In the second step, these factors are mapped onto the existing Northfield factors. By combining principal components with a judicious choice of regression model we are able to maintain parsimony and limit spurious relationships. We tested the model on randomly generate portfolios of commodity contracts and find good results.



T.J Blackburn earned his Ph.D. in Physics from the University of Massachusetts at Amherst in September 2012 where he completed his thesis in Quantum Gravity as well as studying finance. After this he had an internship at Northfield Information Services from June to November of 2013, where he helped improve the coverage of commodity contracts in multi-asset class risk models using a two-step estimation procedure that combined a principal component analysis with a traditional regression-based approach. Next he held a position at BNY Mellon’s Investment Strategy and Solutions Group from November 2013 to June 2014 as an investment analyst. There he helped run a macroeconomic regime-based asset allocation model and performed econometric analysis. He has worked at a very large money manager as a quantitative analyst since June 2014, first in risk management and then in investment management research working on smart beta..


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Hugh Crowther (Treasurer)

Dan diBartolomeo

Steve Gaudette

Mark Kritzman

John Minahan

Donna Cool Murphy (Dinners)

Larry Pohlman

Dan Potter

Dan Rie

Evan Schulman

Michael Wilcox


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