Adjusting MV-efficient portfolio frontier bias for skewed and non-mesokurtic returns

Hung-Hsi Huang, Shin-Hung Lin, Ching-Ping Wang and Chia-Yung Chiu

The North American Journal of Economics and Finance, 2014, vol. 29, issue C, 59-83

Abstract: This study investigates the bias adjustment for mean–variance efficient portfolio frontiers due to population mean and variance estimation error in Taiwan stock market. Although Siegel and Woodgate (2007; Management Science, 53, 1005–1015) and Kan and Smith (2008; Management Science, 54, 1364–1380) suggested two portfolio frontiers that improved upon the out-of-sample performance of a traditional sample portfolio frontier. However, this study shows that, using the copula function and Gram-Charlier series, the two frontiers are theoretically biased toward the actual frontier unless returns behave normally, and the bias is related to the return skewness and kurtosis. Indeed, the two frontiers are empirically biased to the lower-left side of the actual ones, because the Taiwan stock returns are right-skewed and highly leptokurtic. Thus, this study thus proposes revised portfolio frontiers that are closer to the actual frontier than unrevised ones. This improvement may enhance the estimation accuracy of the capital market line, and hence this study can provide an effective investment reference.

Keywords: Mean–variance efficient; Estimation error; Portfolio frontier; Copula function; Gram-Charlier series (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:29:y:2014:i:c:p:59-83

DOI: 10.1016/j.najef.2014.05.005

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