Nonparametric portfolio efficiency measurement with higher moments

Jens J. Krüger

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: The paper considers a nonparametric approach to determine portfolio efficiency using specific directions toward the portfolio frontier function. This approach allows for a straightforward incorporation of higher moments of the returns distribution beyond mean and variance. The nonparametric approach is extended by the computation of optimal directions endogenously by maximizing the distance toward the portfolio frontier as a novel methodological feature. An empirical application to Fama–French portfolios demonstrates the applicability of the nonparametric approach. The results show that the optimal directions to the frontier depend on the portfolio considered as well as on the period for which the moments are estimated. Skewness in particular plays a role in determining the optimal direction, whereas kurtosis seems to be less crucial.

Date: 2021
New Economics Papers: this item is included in nep-eff
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Published in Empirical Economics : Journal of the Institute for Advanced Studies, Vienna, Austria 3 (2021) : pp. 1435-1459

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https://link.springer.com/article/10.1007/s00181-020-01917-0
https://tuprints.ulb.tu-darmstadt.de/23869

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Persistent link: https://EconPapers.repec.org/RePEc:dar:wpaper:130825

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