Abstract
Sustainable economic growth and development of stock market plays an important role in diversifying the investment opportunities that can be assessed accordingly. However, a true diversification in portfolio is impossible without inclusion of higher-order moments, skewness and kurtosis. However, the risk-taking behavior of investors is modelled with the help of higher-order moments of risk. Therefore, this study is intended to construct optimal portfolios and efficient frontiers with the inclusion of higher-order moments of risk. The findings show that optimized portfolios with inclusion of skewness and kurtosis are sustainable and significantly different than those from mean-variance optimized portfolios which show asymmetric and fat-tail risk. Results further confirm its significance in balancing the additional risk dimensions and returns in Asian emerging stock markets for sustainable returns. The results also endorse that induction of skewness and kurtosis affects portfolio allocation weights and expected returns. Therefore, this study strongly recommends the inclusion of higher moments of risk for optimization to curtail their effect and sub-optimal decisions.
Highlights
In today’s world the stock market is considered a gauge for economic development and growth of a country that makes the stock market a vital organ to look at an economy [1,2]
Modern portfolio theory introduces a vital volatility concept and a base for mean-variance portfolio optimization, the once very popular normality assumption about financial time series while optimizing portfolios based on mean-variance is no more valid because of skewed
Modern portfolio theory introduces a vital volatility concept and a base for mean-variance portfolio optimization, the once very popular normality assumption about financial time series while optimizing portfolios based on mean-variance is no more valid because of skewed and volatility clustering phenomena
Summary
In today’s world the stock market is considered a gauge for economic development and growth of a country that makes the stock market a vital organ to look at an economy [1,2]. The stock market helps investors to predict the outcome of an economy, and whether it is sustainable or not [3,4], since the stock market is considered a barometer of economic growth, activities, and other economic functions [5]. These functions include security trading for businesses to raise necessary capital and for investors to accumulate wealth on their invested money as well as liquidate their positions as they need funds. Assets allocations that are not well diversified lead to uncertainty about future outcomes and sustainable economic growth increase risk
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