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

Yanfeng Wang, Wanbo Lu, K.M.R. Boudt

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1815-1831
Number of pages17
JournalQuantitative Finance
Volume23
Issue number12
DOIs
Publication statusPublished - 2023

Bibliographical note

Funding Information:
This work was partially supported by the Characteristic & Preponderant Discipline of Key Construction Universities in Zhejiang Province (Zhejiang Gongshang University-Statistics) and the Collaborative Innovation Center of Statistical Data Engineering Technology & Application. National Natural Science Foundation of China [grant number 71771187, 72011530149, 72163029] and Fundamental Research Funds for the Central Universities in China [grant number JBK190602].

Publisher Copyright:
© 2023 Informa UK Limited, trading as Taylor & Francis Group.

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