Dynamic core-satellite investing using higher order moments: an explicit solution

Yanfeng Wang, Wanbo Lu and Kris Boudt

Quantitative Finance, 2023, vol. 23, issue 12, 1815-1831

Abstract: The goal of core-satellite investing is to optimally balance the portfolio allocation between a core and satellite investment. This paper provides an explicit solution when the investor's optimality criterion is the third-order and fourth-order expansion of the expected utility function, respectively. Based on a numeric example, we document the sensitivity of the proposed weights to coskewness and cokurtosis components. Finally, we use ETFs to examine the portfolio performance of the core-satellite strategy with higher order moments. We document that integrating the higher order moment in core-satellite investing can improve the financial performance of a portfolio.

Date: 2023
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DOI: 10.1080/14697688.2023.2269987

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