Higher-order moments in the theory of diversification and portfolio composition

Trino Ñíguez Grau, Ivan Paya (), David Peel and Javier Perote

No 18297128, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper revisits the corner solution in classical portfolio choice theory in which risk-averse agents would all be optimally plungers rather than diversifiers. We examine the effect of higher-order moments of two-, three- and four-parameter density functions on the investor's decision to diversify in an expected utility framework. The empirical analysis provides estimates of four parametric and two semi-nonparametric densities for the S&P500 and concluded that allocation of all wealth in the risky asset would not have been optimal.

Date: 2013
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (5)

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