NDLI: The Effect of Higher Moments of Risky Asset Return on Portfolio Choice

Content Provider	IEEE Xplore Digital Library
Author	He Chao-lin
Copyright Year	2010
Abstract	This paper studies the effect of higher moments of risky asset return on portfolio choice. It builds the model of portfolio choice problem and approximates its optimal solution as a function of the mean, variance, skewness, and kurtosis of the excess return by applying a Taylor expansion to the Euler equation, which maximizes the expected utility of next period portfolio wealth; based on the daily data of Shanghai Exchange Composite Index from January 2nd, 1991 to December 29th, 2006, it does an empirical study on the property of return distribution and the effect of higher moments on portfolio choice. Results show: the distribution of risky asset return is non-normality; the optimal allocation to the risky asset increases (decreases) with positive (negative) skewness and decreases with excess kurtosis, at the same time, the magnitude of increasing and decreasing increases with the degree of investor's relative risk aversion; time aggregation reduces the magnitude of non-normality, but does not change the effect of higher moments on portfolio choice; positive skewness in the Chinese stock market is different from negative skewness in the U.S. stock market. The study demonstrates that the effect of higher moments of risky asset return should be considered in the context of portfolio choice.
Starting Page	1
Ending Page	4
File Size	238298
Page Count	4
File Format	PDF
ISBN	9781424453252
DOI	10.1109/ICMSS.2010.5577483
Language	English
Publisher	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Publisher Date	2010-08-24
Publisher Place	China
Access Restriction	Subscribed
Rights Holder	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Subject Keyword	Investments Taylor series Resource management Indexes Mathematical model Stock markets Portfolios
Content Type	Text
Resource Type	Article

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