Download this Paper Open PDF in Browser

Portfolio Selection with Higher Moments

50 Pages Posted: 29 Dec 2004 Last revised: 16 Mar 2010

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

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

Date Written: 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.

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

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: https://ssrn.com/abstract=634141 or http://dx.doi.org/10.2139/ssrn.634141

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

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
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

Paper statistics

Downloads
3,772
Rank
1,873
Abstract Views
12,133