Realised Higher Moments: Theory and Practice

Abstract

This paper examines incorporation of higher moments in portfolio selection problems utilizing high frequency data. Our approach combines innovations from the realized volatility literature with a portfolio selection methodology utilising higher moments. We provide an empirical study of the measurement of higher moments from tick by tick data and implement the model for a selection of stocks from the DOW 30 over the time period 2005 to 2011. We demonstrate a novel estimator for moments and co-moments in the presence of microstructure noise.

Keywords: Higher Moments, Asset Allocation, Portfolio Management, Co-movement

JEL Classification: G14, G15, G17