Annals of Finance

, Volume 4, Issue 1, pp 1–28

Optimal portfolio allocation with higher moments

  • Jakša Cvitanić
  • Vassilis Polimenis
  • Fernando Zapatero
Research Article

Abstract

We model the risky asset as driven by a pure jump process, with non-trivial and tractable higher moments. We compute the optimal portfolio strategy of an investor with CRRA utility and study the sensitivity of the investment in the risky asset to the higher moments, as well as the resulting wealth loss from ignoring higher moments. We find that ignoring higher moments can lead to significant overinvestment in risky securities, especially when volatility is high.

Keywords

Pure-jump processes Optimal allocation Higher moments 

JEL Classification Numbers

C61 G11 

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Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  • Jakša Cvitanić
    • 1
  • Vassilis Polimenis
    • 2
  • Fernando Zapatero
    • 3
  1. 1.Division of Humanities and Social SciencesCaltechPasadenaUSA
  2. 2.A. Gary Anderson Graduate School of Business of the University of California at RiversideRiversideUSA
  3. 3.Marshall School of BusinessUSCLos AngelesUSA

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