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Asset allocation under higher moments with the GARCH filter

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  • Ryo Kinoshita

Abstract

Except for several pairs of utility functions and distribution functions, expected utility maximization problems do not have closed-form solutions so that these problems often require complex numerical optimizations. The paper proposes an approximated solution to this problem using higher moments of returns. Utility functions are approximated by polynomials by the Taylor expansion, and thus, expected utility functions are approximated by linear combinations of moments. With the GARCH effects, a simple approach to estimate conditional higher moments is given. In an empirical study, the strategy is compared to alternative strategies such as mean variance optimization and static optimization. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Ryo Kinoshita, 2015. "Asset allocation under higher moments with the GARCH filter," Empirical Economics, Springer, vol. 49(1), pages 235-254, August.
    • Handle: RePEc:spr:empeco:v:49:y:2015:i:1:p:235-254
    DOI: 10.1007/s00181-014-0871-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio allocation; GARCH model; Non-normality; G11; C58; C61;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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