Portfolio Optimization using Higher Order Moments of the Stocks Returns Distribution: The Case of Bucharest Stock Exchange

Abstract

The Modern Portfolio Theory, based on Markowitz’s (1952) work, propose a portfolio selection that consider only the first two moments from a time series of returns. In spite of the popularity of Markowitz’s portfolio selection, many critiques have been emerging throughout the years. All this critics are about the hypothesis that Modern Portfolio Theory uses in order to get the equilibrium on capital markets constrain like the absence of transactions cost and assets financial efficiency. The aim of this paper is to use higher return moments such as skewness and kurtosis for portfolio selection. A series of theoretical papers pointed out that portfolio with excess skewness and smaller kurtosis are preferred by individual investors. Using polynomial goal programming we make a comparison of two different strategies of portfolio selection bases on Bucharest Stock Exchange quotes. Intrinsic reusable preference parameters for higher order moments have resulted with respect to BSE shares. Shares having returns with low sensitivity to the market evolution get to be the most selected ones.