Abstract

http://ssrn.com/abstract=634141
 
 

References (206)



 
 

Citations (59)



 


 



Portfolio Selection with Higher Moments


Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

John Liechty


Pennsylvania State University, University Park

Merrill W. Liechty


Drexel University - Department of Decision Sciences

Peter Mueller


The University of Texas M. D. Anderson Cancer Center

December 13, 2004


Abstract:     
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

working papers series


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Date posted: December 29, 2004 ; Last revised: March 16, 2010

Suggested Citation

Harvey, Campbell R. and Liechty, John and Liechty, Merrill W. and Mueller, Peter, Portfolio Selection with Higher Moments (December 13, 2004). Available at SSRN: http://ssrn.com/abstract=634141 or http://dx.doi.org/10.2139/ssrn.634141

Contact Information

Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
John Liechty
Pennsylvania State University, University Park ( email )
University Park
State College, PA 16802
United States
Merrill W. Liechty
Drexel University - Department of Decision Sciences ( email )
3141 Chestnut St
Philadelphia, PA 19104
United States
215-895-2459 (Phone)
215-895-2907 (Fax)
HOME PAGE: http://www.pages.drexel.edu/~mwl25/
Peter Mueller
The University of Texas M. D. Anderson Cancer Center ( email )
Houston, TX 77030
United States
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