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Dynamic core-satellite investing using higher order moments: an explicit solution

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  • Yanfeng Wang
  • Wanbo Lu
  • Kris Boudt

Abstract

The goal of core-satellite investing is to optimally balance the portfolio allocation between a core and satellite investment. This paper provides an explicit solution when the investor's optimality criterion is the third-order and fourth-order expansion of the expected utility function, respectively. Based on a numeric example, we document the sensitivity of the proposed weights to coskewness and cokurtosis components. Finally, we use ETFs to examine the portfolio performance of the core-satellite strategy with higher order moments. We document that integrating the higher order moment in core-satellite investing can improve the financial performance of a portfolio.

Suggested Citation

  • Yanfeng Wang & Wanbo Lu & Kris Boudt, 2023. "Dynamic core-satellite investing using higher order moments: an explicit solution," Quantitative Finance, Taylor & Francis Journals, vol. 23(12), pages 1815-1831, October.
    • Handle: RePEc:taf:quantf:v:23:y:2023:i:12:p:1815-1831
    DOI: 10.1080/14697688.2023.2269987
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