Michael Rockinger is also CEPR. He acknowledges help from the Swiss National Science Foundation through NCCR (Financial Valuation and Risk Management). The usual disclaimer applies. The authors would like to thank an anonymous referee for helpful comments that has improved the quality of the paper. Correspondence: Michael Rockinger.
Optimal Portfolio Allocation under Higher Moments
Article first published online: 9 JAN 2006
European Financial Management
Volume 12, Issue 1, pages 29–55, January 2006
How to Cite
Jondeau, E. and Rockinger, M. (2006), Optimal Portfolio Allocation under Higher Moments. European Financial Management, 12: 29–55. doi: 10.1111/j.1354-7798.2006.00309.x
- Issue published online: 9 JAN 2006
- Article first published online: 9 JAN 2006
- asset allocation;
- stock returns;
- utility function
We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operational even for a large number of assets. While the mean-variance criterion provides a good approximation of the expected utility maximisation under moderate non-normality, it may be ineffective under large departure from normality. In such cases, the three-moment or four-moment optimisation strategies may provide a good approximation of the expected utility.