Original scientific paper
https://doi.org/10.1080/1331677X.2017.1340182
Portfolio optimisation with higher moments of risk at the Pakistan Stock Exchange
Bushra Naqvi
; Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan
Nawazish Mirza
orcid.org/0000-0003-4265-9519
; SP Jain School of Global Management, Dubai, UAE
Waqar Azeem Naqvi
; Department of Commerce, University of Sargodha (Lahore Campus), Lahore, Pakistan
S. K. A. Rizvi
; Department of Finance, Lahore School of Economics, Lahore, Pakistan
Abstract
Stock markets play an important role in spurring economic growth
and development through diversification opportunities. However,
diversification cannot be truly achieved if we continue to ignore
additional dimensions of risk, namely skewness and kurtosis. This
study incorporates higher moments of risk to form a mean-varianceskewness-kurtosis
based framework for portfolio optimisation.
Inclusion of higher moments in optimisation framework acknowledges
the risk of asymmetric returns and fat-tail risk and can help investors
in formulating optimal portfolios of stocks which can be significantly
divergent from the ones they obtain through the Markowitz meanvariance
optimisation. Our results confirm the presence of tradeoff
between returns and additional dimensions of risk in Pakistan
Stock Exchange (PSX) and strongly suggest including them in the
optimisation framework to avoid sub-optimal decisions and to curtail
exposure towards higher moments of risks.
Keywords
Mean-variance optimisation; kurtosis; skewness; fat-tail risk; Pakistan
Hrčak ID:
193201
URI
Publication date:
1.12.2017.
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