Optimal portfolio choice for higher-order risk averters

Yi Fang, Thierry Post

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)


The effects of higher-order risk aversion on optimal cross-sectional portfolio choice are investigated using portfolio optimization with Stochastic Dominance constraints. Tractable sufficient conditions for higher-degree dominance are introduced that take the form of a system of linear inequalities. Existing studies of active equity industry rotation are extended from lower degrees to higher degrees of dominance. Fourth-degree dominance assumes that investors are ‘prudent’ and ‘temperate’ and therefore like skewness and dislike kurtosis. Using this dominance criterion leads to superior out-of-sample investment performance, by allowing for more concentration in recent winner industries which tend to show persistent positive abnormal returns and a favorable higher-order risk profile due to the industry-level price momentum effect.

Original languageEnglish
Article number106429
JournalJournal of Banking and Finance
Publication statusPublished - Apr 2022


  • Active portfolio management
  • Higher-order risk
  • Linear programming
  • Portfolio choice
  • Portfolio optimization

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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