Optimal portfolio allocation under higher moments

European Financial Management

Volumn 12, Issue 1, 2006, Pages 29-55

  Jondeau, Eric ^a   Rockinger, Michael ^a,b  

^a UNIVERSITY OF LAUSANNE   (Switzerland)

^b CEPR ^*  (Switzerland)

Author keywords

Asset allocation; Non normality; Stock returns; Utility function

Indexed keywords

EID: 33847041299     PISSN: 13547798     EISSN: 1468036X     Source Type: Journal    
DOI: 10.1111/j.1354-7798.2006.00309.x     Document Type: Article

References (70)

1. Ang, A. Bekaert, G., 'International asset allocation with regime shifts', Review of Financial Studies, Vol. 15, 2002, pp. 1137 1387.
2. Arditti, F., 'Risk and the required return on equity', Journal of Finance, Vol. 22, 1967, pp. 19 36.
3. Athayde, G. M. Flôres R. G., 'Incorporating skewness and kurtosis in portfolio optimization: A multidimensional efficient set', in S. Satchell A. Scowcraft (eds), Advances in Portfolio Construction and Implementation Butterworth-Heinemann Finance, 2003), pp. 243 57.
4. Athayde, G. M. Flôres R. G., 'Finding a maximum skewness portfolio - A general solution to three-moments portfolio choice', Journal of Economic Dynamics and Control, Vol. 28, 2004, pp. 1335 52.
5. Barone-Adesi, G., 'Arbitrage equilibrium with skewed asset returns', Journal of Financial and Quantitative Analysis, Vol. 20, 1985, pp. 299 313.
6. Bauwens, L. Laurent, S., 'A new class of multivariate skew densities, with application to GARCH models', Journal of Business and Economic Statistics, Vol. 23, 2005 pp. 346 54.
7. Bekaert, G. Harvey, C. R., 'Emerging equity market volatility', Journal of Financial Economics, Vol. 43, 1997, pp. 29 77.
8. Benishay, H., 'The Pratt-Arrow requirement in a fourth degree polynomial utility function', Journal of Accounting, Auditing and Finance, Vol. 7, 1992, pp. 97 115.
9. Berényi, Z., 'Accounting for illiquidity and non-normality of returns in the performance assessment', Working Paper( University of Munich, 2001).
10. Blattberg, R. Gonedes, N., 'A comparison of stable and Student distributions as statistical models for stock prices', Journal of Business, Vol. 47, 1974, pp. 244 80.
11. Brandt, M. W. Diebold, F. X., 'A no-arbitrage approach to range-based estimation of return covariances and correlations', Working Paper n°03-013 ( Penn Institute for Economic Research, 2003).
12. Brockett, P. L. Garven, J. R., 'A reexamination of the relationship between preferences and moment orderings by rational risk averse investors', Geneva Papers on Risk and Insurance Theory, Vol. 23, 1998, pp. 127 37.
13. Campbell, J. Y. Viceira, L. M., 'Consumption and portfolio decisions when expected returns are time varying', Quarterly Journal of Economics, Vol. 114, 1999, pp. 433 95.
14. Chamberlain, G., 'A characterization of the distributions that imply mean-variance utility functions', Journal of Economic Theory, Vol. 29, 1983, pp. 185 201.
15. Chunhachinda, P., Dandapani, K., Hamid, S. Prakash, A. J., 'Portfolio selection and skewness: evidence from international stock markets', Journal of Banking and Finance, Vol. 21, 1997, pp. 143 67.
16. Diebold, F. X., 'Testing for serial correlation in the presence of ARCH', Proceedings from the American Statistical Association, Business and Economic Statistics, Section 323 328 (1987).
17. Dittmar, R. F., 'Nonlinear pricing kernels, kurtosis preference, and evidence from the cross section of equity returns', Journal of Finance, Vol. 57, 2002, pp. 369 403.
18. Doornik, J. A. Hansen, H., 'An omnibus test for univariate and multivariate normality', Working Paper( Nuffield College, 1994).
19. Ederington, L., 'Mean-variance as an approximation to expected utility maximisation', Working Paper 86 5 Washington University, 1986).
20. Engle, R. F., 'Auto-regressive conditional heteroskedasticity with estimates of the variance of United Kingdom inflation', Econometrica, Vol. 50, 1982, pp. 987 1007.
21. Fama, E., 'Mandelbrot and the stable paretian hypothesis,' Journal of Business, Vol. 36, 1963, pp. 420 29.
22. Fama, E., 'The behavior of stock market prices', Journal of Business, Vol. 38, 1965, pp. 34 105.
23. Fang, H. Lai, T.-Y., 'Co-kurtosis and capital asset pricing', Financial Review, Vol. 32, 1997, pp. 293 307.
24. Friend, I. Westerfield, R., 'Co-skewness and capital asset pricing', Journal of Finance, Vol. 35, 1980, pp. 897 913.
25. Graflund, A. Nilsson, B., 'Dynamic portfolio selection: the relevance of switching regimes and investment horizon', European Financial Management, Vol. 9, 2003, pp. 179 200.
26. Guidolin, M. Timmermann, A., 'Optimal portfolio choice under regime switching, skew and kurtosis preferences', Working Paper( University of California San Diego, 2003).
27. Hanoch, G. Levy, H., 'Efficient portfolio selection with quadratic and cubic utility', Journal of Business, Vol. 43, 1970, pp. 181 89.
28. Hansen, B. E., 'Autoregressive conditional density estimation', International Economic Review, Vol. 35, 1994, pp. 705 30.
29. Harvey, C. R., 'Predictable risk and returns in emerging markets', Review of Financial Studies, Vol. 8, 1995, pp. 773 816.
30. Harvey, C. R., Liechty, J. C., Liechty, M. W. Müller, P., 'Portfolio selection with higher moments', Working Paper( Duke University Durham, 2002).
31. Harvey, C. R. Siddique, A., 'Conditional skewness in asset pricing tests', Journal of Finance, Vol. 55, 2000, pp. 1263 95.
32. Hlawitschka, W., 'The empirical nature of Taylor series approximations to expected utility', American Economic Review, Vol. 84, 1994, pp. 713 19.
33. Hwang, S. Satchell, S. E., 'Modelling emerging market risk premia using higher moments', Journal of Finance and Economics, Vol. 4, 1999, pp. 271 96.
34. Jarque, C. M. Bera, A. K., 'Efficient tests for normality, homoscedasticity and serial independence of regression residuals', Economics Letters, Vol. 6, 1980, pp. 255 59.
35. Jondeau, E. Rockinger, M., 'Conditional volatility, skewness, and kurtosis: Existence, persistence, and comovements', Journal of Economic Dynamic and Control, Vol. 27, 2003a, pp. 1699 1737.
36. Jondeau, E. Rockinger, M., 'Testing for differences in the tails of stock-market returns', Journal of Empirical Finance, Vol. 10, 2003b, pp. 559 81.
37. Jurczenko, E. Maillet, B., 'The 3-CAPM: Theoretical foundations and an asset pricing model comparison in a unified framework', in C. Dunis, A. Timmermann J. Moody (eds), Developments in Forecast Combination and Portfolio Choice John Wiley & Sons, 2001), pp. 239 73.
38. Jurczenko, E. Maillet, B., 'The four-moment capital asset pricing model: some basic results', Cahier de Recherche E.S.C.P. n°03-154, 2003.
39. Kandel, S. Stambaugh, R. F., 'On the predictability of stock returns: an asset-allocation perspective', Journal of Finance, Vol. 51, 1996, pp. 385 424.
40. Kimball, M. S., 'Standard risk aversion', Econometrica, Vol. 61, 1993, pp. 589 611.
41. Kon, S., 'Models of stock returns - A comparison', Journal of Finance, Vol. 39, 1984, pp. 147 65.
42. Kotz, S., Balakrishnan, N. Johnson, N. L., Continuous Multivariate Distributions, Volume 1: Models and Applications John Wiley, New York, 2000).
43. Kraus, A. Litzenberger, R. H., 'Skewness preference and the valuation of risk assets', Journal of Finance, Vol. 31, 1976, pp. 1085 1100.
44. Kroll, Y., Levy, H. Markowitz, H. M., 'Mean-variance versus direct utility maximization', Journal of Finance, Vol. 36, 1984, pp. 47 61.
45. Lai, T. Y., 'Portfolio selection with skewness: a multiple-objective approach', Review of Quantitative Finance and Accounting, Vol. 1, 1991, pp. 293 305.
46. Ledoit, O. Wolf, M., 'Honey, I shrunk the sample covariance matrix', Journal of Portfolio Management, Vol. 31, 2004, pp. 110 19.
47. Lee, J. H. H. King, M. L., 'A locally most mean powerful based score test for ARCH and GARCH regression disturbances', Journal of Business and Economic Statistics, Vol. 11, 1993, pp. 17 27.
48. Levy, H., 'A utility function depending on the first three moments', Journal of Finance, Vol. 24, 1969, pp. 715 19.
49. Levy, H. Markowitz, H. M., 'Approximating expected utility by a function of mean and variance', American Economic Review, Vol. 69, 1979, pp. 308 17.
50. Lhabitant, F. S., 'On the (ab)use of Taylor series approximations for portfolio selection, portfolio performance and risk management', Working Paper( University of Lausanne, 1998).
51. Loistl, O., 'The erroneous approximation of expected utility by means of a Taylor's series expansion: analytic and computational results', American Economic Review, Vol. 66, 1976, pp. 904 10.
52. Longin, F. M., 'The asymptotic distribution of extreme stock market returns', Journal of Business, Vol. 69, 1996, pp. 383 408.
53. Malkiel, B. G., 'Passive investment strategies and efficient markets', European Financial Management, Vol. 9, 2003, pp. 1 10.
54. Mandelbrot, B., 'The variation of certain speculative prices', Journal of Business, Vol. 35, 1963, pp. 394 419.
55. Mardia, K. V., 'Measures of multivariate skewness and kurtosis with applications', Biometrika, Vol. 57, 1970, pp. 519 30.
56. Markowitz, H. M., 'Portfolio selection', Journal of Finance, Vol. 7, 1952, pp. 77 91.
57. Peiro, A., 'Skewness in financial returns', Journal of Banking and Finance, Vol. 23, 1999, pp. 847 62.
58. Prakash, A., Chang, C. Pactwa, T., 'Selecting a portfolio with skewness: recent evidence from US, European, and Latin American equity markets', Journal of Banking and Finance, Vol. 27, 2003, pp. 1375 90.
59. Pratt, J. W. Zeckhauser, R. J., 'Proper risk aversion', Econometrica, Vol. 55, 1987, pp. 143 54.
60. Pulley, L. B., 'A general mean-variance approximation to expected utility for short holding period', Journal of Financial and Quantitative Analysis, Vol. 16, 1981, pp. 361 73.
61. Rubinstein, M. E., 'The fundamental theorem of parameter-preference security valuation', Journal of Financial and Quantitative Analysis, Vol. 8, 1973, pp. 61 69.
62. Sahu, S. K., Dey, D. K. Branco, M. D., 'A new class of multivariate skew distributions with applications to Bayesian regression models', Canadian Journal of Statistics, Vol. 31, 2003, pp. 129 50.
63. Samuelson, P., 'The fundamental approximation theorem of portfolio analysis in terms of means, variances and higher moments', Review of Economic Studies, Vol. 37, 1970, pp. 537 42.
64. Scott, R. C. Horvath, P. A., 'On the direction of preference for moments of higher order than the variance', Journal of Finance, Vol. 35, 1980, pp. 915 19.
65. Simaan, Y., 'Portfolio selection and asset pricing - three-parameter framework', Management Science, Vol. 39, 1993a, pp. 568 77.
66. Simaan, Y., 'What is the opportunity cost of mean-variance investment strategies?', Management Science, Vol. 39, 1993b, pp. 578 87.
67. Simkowitz, M. A. Beedles, W. L., 'Diversification in a three-moment world', Journal of Financial and Quantitative Analysis, Vol. 13, 1978, pp. 927 41.
68. Singleton, J. C. Wingender, J., 'Skewness persistence in common stock returns', Journal of Financial and Quantitative Analysis, Vol. 21, 1986, pp. 335 41.
69. Small, N. J. H., 'Marginal skewness and kurtosis in testing multivariate normality', Applied Statistics, Vol. 29, 1980, pp. 85 7.
70. Tauchen, G. Hussey, R., 'Quadrature-based methods for obtaining approximate solutions to nonlinear asset pricing models', Econometrica, Vol. 59, 1991, pp. 371 96.