International Portfolio Allocation: The Role of Conditional Higher Moments

Posted: 17 Jan 2020

See all articles by Trung H. Le

Trung H. Le

State Bank of Vietnam - Banking Academy of Vietnam

Date Written: April 23, 2019

Abstract

I explore the benefits of incorporating conditional higher moments in the international portfolio allocation. The quantile-based conditional higher moments are robust to the outliers and exhibit considerable time-variation and heterogeneity across countries. My empirical evidence shows that emerging market returns have favourable conditional skewness but are more exposed to extreme returns with higher kurtosis. In the international portfolio, the investor tilts her portfolio towards countries with higher skewness and less kurtosis, consistent with her moment preference in theory. An investor with moderate risk aversion would be willing to pay 210 basis points per year to switch from a three-moment portfolio to the portfolio that employs both conditional skewness and kurtosis. The results are robust to real-time investing strategy, transaction costs and alternative model specifications.

Keywords: Mixed Data Sampling (MIDAS), Higher moments, Parametric Portfolio, International Diversification

JEL Classification: C14, F65, G11, G15

Suggested Citation

Le, Trung H., International Portfolio Allocation: The Role of Conditional Higher Moments (April 23, 2019). Available at SSRN: https://ssrn.com/abstract=3509436 or http://dx.doi.org/10.2139/ssrn.3509436

Trung H. Le (Contact Author)

State Bank of Vietnam - Banking Academy of Vietnam ( email )

No.12, Chuaboc Street
Dong Da District
Hanoi, Hanoi 10000
Vietnam

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