Portfolio Selection with Higher Moments
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Pennsylvania State University, University Park
Merrill W. Liechty
Drexel University - Department of Decision Sciences
The University of Texas M. D. Anderson Cancer Center
December 13, 2004
We propose a method for optimal portfolio selection using a Bayesian decision theoretic framework that addresses two major shortcomings of the Markowitz approach: the ability to handle higher moments and estimation error. We employ the skew normal distribution which has many attractive features for modeling multivariate returns. Our results suggest that it is important to incorporate higher order moments in portfolio selection. Further, our comparison to other methods where parameter uncertainty is either ignored or accommodated in an ad hoc way, shows that our approach leads to higher expected utility than the resampling methods that are common in the practice of finance.
Number of Pages in PDF File: 50
Keywords: Bayesian decision problem, multivariate skewness, parameter uncertainty, optimal portfolios, utility function maximization, resampling, resampled portfolios, estimation error, mean-variance portfolios, expected returns, Markowitz optimization
JEL Classification: G11, G12, G10, C11
Date posted: December 29, 2004 ; Last revised: March 16, 2010
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.344 seconds