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Higher-order moments in the theory of diversification and portfolio composition

Author

Listed:
  • Trino-Manuel Niguez
  • Ivan Paya
  • David Peel
  • Javier Perote

Abstract

This paper revisits the corner solution in classical portfolio choice theory in which risk-averse agents would all be optimally plungers rather than diversifiers. We examine the effect of higher-order moments of two-, three- and four-parameter density functions on the investor's decision to diversify in an expected utility framework. The empirical analysis provides estimates of four parametric and two semi-nonparametric densities for the S&P500 and concluded that allocation of all wealth in the risky asset would not have been optimal.

Suggested Citation

  • Trino-Manuel Niguez & Ivan Paya & David Peel & Javier Perote, 2013. "Higher-order moments in the theory of diversification and portfolio composition," Working Papers 18297128, Lancaster University Management School, Economics Department.
  • Handle: RePEc:lan:wpaper:18297128
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/Paya_2013_3.pdf
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    References listed on IDEAS

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    1. repec:eee:phsmap:v:485:y:2017:i:c:p:35-47 is not listed on IDEAS
    2. Cortés, Lina M. & Mora-Valencia, Andrés & Perote, Javier, 2017. "Measuring firm size distribution with semi-nonparametric densities," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 485(C), pages 35-47.

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