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    Rights statement: This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 12/02/2019, available online: https://www.tandfonline.com/doi/full/10.1080/14697688.2018.1550264

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    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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Flexible distribution functions, higher-order preferences and optimal portfolio allocation

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<mark>Journal publication date</mark>1/04/2019
<mark>Journal</mark>Quantitative Finance
Issue number4
Volume19
Number of pages5
Pages (from-to)699-703
Publication StatusPublished
Early online date12/02/19
<mark>Original language</mark>English

Abstract

In this paper we show that flexible probability distribution functions, in addition to being able to capture stylized facts of financial returns, can be used to identify pure higher-order effects of investors' optimizing behavior. We employ the five-parameter weighted generalized beta of the second kind distribution—and other density functions nested within it—to determine the conditions under which risk averse, prudent and temperate agents are diversifiers in the standard portfolio choice theory. Within this framework, we illustrate through comparative statics the economic significance of higher-order moments in return distributions.

Bibliographic note

This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 12/02/2019, available online: https://www.tandfonline.com/doi/full/10.1080/14697688.2018.1550264