Higher Order Comoments of Multifactor Models and Asset Allocation

13 Pages Posted: 18 Mar 2014 Last revised: 21 Nov 2017

See all articles by Kris Boudt

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Wanbo Lu

Southwestern University of Finance and Economics (SWUFE)

Benedict Peeters

Finvex Group

Date Written: June 16, 2014

Abstract

Accurate estimates of the higher order comoments are needed in asset allocation. We derive explicit formulas for the higher order comoments under the assumption that stock returns are generated by a multifactor model and show that this assumption leads to a substantial reduction in the number of parameters to estimate compared to the traditional approach. An out-of-sample analysis of the performance of portfolio allocation criteria that depend on the higher order comoments illustrates the usefulness of the proposed methodology.

Keywords: factor models, higher order comoments, portfolio selection

JEL Classification: G110, C580

Suggested Citation

Boudt, Kris and Lu, Wanbo and Peeters, Benedict, Higher Order Comoments of Multifactor Models and Asset Allocation (June 16, 2014). Finance Research Letters, 13, 225-233, 2014, Available at SSRN: https://ssrn.com/abstract=2409603 or http://dx.doi.org/10.2139/ssrn.2409603

Kris Boudt (Contact Author)

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Wanbo Lu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Benedict Peeters

Finvex Group ( email )

Arenbergstraat 44
Brussels, B-1000
Belgium

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