Trading Downside Volatility in Commodities

Testing new research and building a multi-signal portfolio

Over the past two weeks, I have shown that sorting commodity futures based on downside risk, via realized skewness and downside asymmetry, produces meaningful long–short returns with solid Sharpe ratios.

This week, I examine a complementary downside volatility measure: The gap between a contract’s downside and upside volatility (“volatility asymmetry”). Recent research has found that sorting on this difference yields a significant return premium that cannot be explained by other downside-risk metrics.

I’ll briefly review the idea and related evidence, detail how the downside-vol portfolios are constructed, and report out-of-sample tests with robustness checks. Finally, I combine this signal with the two from prior posts to build a multi-signal long-short portfolio, which in my tests delivers a 9–10% annualized return with a Sharpe of about 0.60 after costs.