Title: Portfolio management with higher moments: the cardinality impact
Authors: Brito, Rui Pedro 
Sebastião, Hélder 
Godinho, Pedro 
Keywords: portfolio management;cardinality;expected utility maximization;CRRA preferences;derivative-free optimization;PSI20 index
Issue Date: 17-Mar-2017
Publisher: Wiley
Abstract: This paper extends the study of the cardinality impact on portfolio performance, from the traditional mean-variance framework to more general frameworks that include higher moments. For each framework, we propose a biobjective model that allows the investor to explicitly analyze the efficient trade-off between expected utility and cardinality. We applied the proposed methodology to data from the Portuguese Stock Index (PSI20 index). The empirical results show that, in-sample, the certainty equivalent and the Sharpe ratio increase with the cardinality level in all frameworks. The results also suggest that there are no performance gains, in-sample, in terms of certainty equivalent, when higher moments are considered. Out of sample, the turnover increases up to a certain cardinality level, then decreases. For certain cardinality levels, there are gains in terms of out-of-sample certainty equivalent and Sharpe ratio, when skewness and kurtosis are considered. Finally, we check the robustness of these results in a large dataset from the EUROSTOXX50 index.
URI: http://hdl.handle.net/10316/45744
ISSN: 0969-6016
DOI: 10.1111/itor.12404.
Rights: embargoedAccess
Appears in Collections:I&D CeBER - Artigos em Revistas Internacionais

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