Pure higher-order effects in the portfolio choice model

Ñíguez, T.M., Paya, I. and Peel, D. 2016. Pure higher-order effects in the portfolio choice model. Finance Research Letters. 19, pp. 255-260.

TitlePure higher-order effects in the portfolio choice model
AuthorsÑíguez, T.M., Paya, I. and Peel, D.
Abstract

This paper examines the effects of higher-order risk attitudes and statistical moments on the optimal allocation of risky assets within the standard portfolio choice model. We derive the expressions for the optimal proportion of wealth invested in the risky asset to show they are functions of portfolio returns third- and fourth-order moments as well as on the investor’s risk preferences of prudence and temperance. We illustrate the relative importance that the introduction of those higher-order effects have in the decision of expected utility maximizers using data for the US.

KeywordsHigher-order moments; Portfolio choice; Prudence; Taylor approximation; Temperance
JournalFinance Research Letters
Journal citation19, pp. 255-260
ISSN1544-6123
Year2016
PublisherElsevier
Accepted author manuscriptPure_FRL_NPP.pdf
Supplementary data or filesFRL_data.pdf
Digital Object Identifier (DOI)doi:10.1016/j.frl.2016.08.010
Publication dates
Published online11 Aug 2016
Published11 Aug 2016
Published in printNov 2016
LicenseCC BY-NC-ND 4.0

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