Controlling portfolio skewness and kurtosis without directly optimizing third and fourth moments |
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Authors: | Woo Chang Kim Frank J Fabozzi Patrick Cheridito Charles Fox |
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Institution: | 1. Department of Industrial and Systems Engineering, Korea Advanced Institute of Science and Technology (KAIST), 91 Daehak-ro, Yuseong-gu, Daejeon 305-701, Republic of Korea;2. EDHEC Business School, 393, Promenade des Anglais BP3116, 06202 Nice Cedex 3, Nice, France;3. Department of Operations Research and Financial Engineering, Princeton University, Sherrerd Hall, Princeton University, Princeton, NJ 08542, USA;4. Pimco, 840 Newport Circle Dr. Newport Beach, CA 92660, USA |
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Abstract: | In spite of their importance, third or higher moments of portfolio returns are often neglected in portfolio construction problems due to the computational difficulties associated with them. In this paper, we propose a new robust mean–variance approach that can control portfolio skewness and kurtosis without imposing higher moment terms. The key idea is that, if the uncertainty sets are properly constructed, robust portfolios based on the worst-case approach within the mean–variance setting favor skewness and penalize kurtosis. |
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Keywords: | G11 C61 C63 C65 |
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