Rolling Methodology
In contrast to the DBLCI, the DBLCI-MR undertakes no annual re-balancing. Instead, the individual commodity weights are reset every time any one of the commodities undergoes a ‘trigger event’. This happens when the one-year moving average of the commodity price is a whole multiple of 5% away from the five-year moving average. When this happens, the weights of all the commodities are re-balanced such that ‘expensive’ commodities have their weights reduced while ‘cheap’ commodities have their weights increased according to a simple, pre-defined formula. The entire process is rule-based and mandatory. The fact that there exist clear pre-set ‘hurdle rates’ to trigger a re-weighting, minimises the number of re-weightings and thus reduces the transactions costs for replication.
Read more about this topic: DBLCI Mean Reversion (MR) Index
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