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The effectiveness of incorporating higher moments in portfolio strategies: evidence from the Chinese commodity futures markets

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  • Qingfu Liu
  • Pan Jiang
  • Yunbi An
  • Keith Cheung

Abstract

This paper examines portfolio strategies that incorporate individual and systematic higher-order moments, within a stochastic optimization framework with uncertain mean and covariance. Using weekly, daily, and 30-minute interval data on Chinese commodity futures, we show that incorporating higher moments into portfolio strategies generally leads to better performance. The systematic fourth-order moment, among all systematic moments considered, can lead to the most robust, and a relatively large, improvement in investment performance, while the contribution of individual moments to the improved performance depends on the data horizon. We also find that adding higher moments brings superior performance in more cases for 30-minute-interval data than for other low-frequency data, suggesting that our strategy most likely performs best in 30-minute-rebalancing investments.

Suggested Citation

  • Qingfu Liu & Pan Jiang & Yunbi An & Keith Cheung, 2020. "The effectiveness of incorporating higher moments in portfolio strategies: evidence from the Chinese commodity futures markets," Quantitative Finance, Taylor & Francis Journals, vol. 20(4), pages 653-668, April.
    • Handle: RePEc:taf:quantf:v:20:y:2020:i:4:p:653-668
    DOI: 10.1080/14697688.2019.1687926
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    Cited by:

    1. Giuseppe Arbia & Riccardo Bramante & Silvia Facchinetti, 2020. "Least Quartic Regression Criterion to Evaluate Systematic Risk in the Presence of Co-Skewness and Co-Kurtosis," Risks, MDPI, vol. 8(3), pages 1-14, September.
    2. Cui, Jinxin & Maghyereh, Aktham & Goh, Mark & Zou, Huiwen, 2022. "Risk spillovers and time-varying links between international oil and China’s commodity futures markets: Fresh evidence from the higher-order moments," Energy, Elsevier, vol. 238(PB).
    3. Ahmed, Walid M.A. & Al Mafrachi, Mustafa, 2021. "Do higher-order realized moments matter for cryptocurrency returns?," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 483-499.
    4. Jinxin Cui & Aktham Maghyereh, 2022. "Time–frequency co-movement and risk connectedness among cryptocurrencies: new evidence from the higher-order moments before and during the COVID-19 pandemic," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-56, December.
    5. Apergis, Nicholas, 2023. "Realized higher-order moments spillovers across cryptocurrencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).

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