Published January 2008
| public
Journal Article
Optimal portfolio allocation with higher moments
Abstract
We model the risky asset as driven by a pure jump process, with non-trivial and tractable higher moments. We compute the optimal portfolio strategy of an investor with CRRA utility and study the sensitivity of the investment in the risky asset to the higher moments, as well as the resulting wealth loss from ignoring higher moments. We find that ignoring higher moments can lead to significant overinvestment in risky securities, especially when volatility is high.
Additional Information
© Springer-Verlag 2007. Received: 9 March 2006 / Revised: 19 February 2007 / Published online: 16 March 2007. The research of J. Cvitanić was supported in part by the National Science Foundation, under grants DMS 04-03575 and DMS 06-31366. Previous versions of this paper have been presented in seminars at USC, Cemfi (Madrid), and the 2006 Winter Meetings of the Econometric Society. We are grateful to Michael Johaness (the discussant), seminar participants, and an anonymous referee, for many comments and suggestions. Remaining errors are our sole responsibility.Additional details
- Eprint ID
- 98250
- DOI
- 10.1007/s10436-007-0071-5
- Resolver ID
- CaltechAUTHORS:20190826-124741137
- DMS 04-03575
- NSF
- DMS 06-31366
- NSF
- Created
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2019-08-26Created from EPrint's datestamp field
- Updated
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2023-09-28Created from EPrint's last_modified field