- Why EDHEC
- All programmes
- Executive Education
- Research and Innovation
-
Companies and careers
Working with and for companiesThe company is the focal point of EDHEC’s plan, and its reason for being.
- EDHEC Experience
Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters
Since hedge fund returns are not normally distributed, mean-variance optimisation techniques, which would lead to substantial welfare losses from the investor’s perspective, need to be replaced by optimisation procedures incorporating higher-order moments and comoments.
Author(s) :
Junior researcher at the University of Milano - Bicocca (Italy).
Professor of finance at EDHEC Business School and scientific director of EDHEC-Risk Institute.
Holds the chair of Mathematical Finance at the University of Milano - Bicocca.
Presentation :
In this context, optimal portfolio decisions involving hedge fund style allocation require not only estimates for covariance parameters but also estimates for coskewness and cokurtosis parameters. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This paper presents an application of the improved estimators for higherorder co-moment parameters, recently introduced by Martellini and Ziemann (2010), in the context of hedge fund portfolio optimisation. We find that the use of these enhanced estimates generates a significant improvement for investors in hedge funds. We also find that it is only when improved estimators are used that portfolio selection with higherorder moments consistently dominates mean-variance analysis from an out-ofsample perspective. Our results have important potential implications for hedge fund investors and hedge fund of funds managers who routinely use portfolio optimisation procedures incorporating higher moments.| Type : | Publication EDHEC |
|---|---|
| Date : | le 28/09/2010 |
| Extra information : | For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School. |
| Research Cluster : | Finance |
See Also
About EDHEC
Located in Lille, Nice, Paris, London and Singapore, EDHEC is one of the 20 best business schools in the world. Resolutely international and directly connected to the world of business, it is known for the excellence of its research and its capacity to train entrepreneurs and managers able to move the lines.
A true laboratory of ideas, it produces innovative solutions recognized by companies.
Her research is irrigating her teaching based on "build people to build business" and "learning by doing".
