Skewness-Based Portfolio Selection: Implications for International Investing in Frontier Markets
DOI:
https://doi.org/10.14665/1614-4007-26-003Keywords:
international portfolio investing, skewness, frontier markets, returns distribution moments, relative foreign exchange percentage differentialAbstract
Using the Morgan Stanley Capital International index monthly data for 28 frontier markets during the period between January 2011 and December 2018 the paper investigates the impact of skewness on portfolio selection. The existence of skewness in returns distributions is illustrated in terms of frontier markets. The skewness ranks matrix is developed. It demonstrates that only 6 markets can be regarded as not skewed from USD and 11 – from EUR perspective. The study does not find strong evidence on positive or negative skewness character. All in all, skewness for local currencies is slightly higher than for foreign currencies. It is the factor of international portfolio investing in frontier markets but its impact should not be overestimated. Analytical framework for skewness-based investing in frontier markets is developed. It does not indicate strong evidence that skewness is a more important portfolio selection factor for international investments than for domestic ones. Skewness is rather more relevant for domestic portfolio investing. Using the approach of relative foreign exchange percentage differential, the study proves the more notable impact of skewness for EUR than for USD international investors. As to the preferable moment, the found evidence is weak but rather in favor of skewness than return for local investing and in favor of return for international investing.Downloads
References
Arditti F. (1967) Risk and the Required Return of Equity. The Journal of Finance 22(1):19-36.
Bhattacharyya R., Hossain S., Kar S. (2014) Fuzzy Cross-Entropy, Mean, Variance, Skewness Models for Portfolio Selection. Journal of King Saud University – Computer and Information Sciences 26(1):79-87.
Briec W., Kerstens K., Woestyne I. (2013) Portfolio Selection with Skewness: A Comparison of Methods and a Generalized One Fund Result. European Journal of Operational Research 230(2):412-421.
Brys G., Hubert M., Struyf A. (2004) A Robust Measure of Skewness. Journal of Computational and Graphical Statistics 13(4):996-1017.
Cenela M., Collazo E. (2007) Portfolio Selection with Skewness in Emerging Market Industries. Emerging Markets Review 8(3):230-250.
Conrad J., Dittmar R., Ghysels E. (2013) Ex Ante Skewness and Expected Stock returns. The Journal of Finance 68(1):85-124.
DeMiguel V. et al. (2013) Improving Portfolio Selection Using Option-Implied Volatility and Skewness. The Journal of Financial and Quantitative Analysis 48(6):1813-1845.
Dey K., Mitra D. (2012) Portfolio Selection Revisited: Evidence from the Indian Stock Market. The IUP Journal of Applied Finance 18(3):31-47.
Galloppo G. (2010) A Comparison of Pre and Post Modern Portfolio Theory Using Resampling. Global Journal of Business Research 4(1):1-16.
Jiang C., Ma Y., An Y. (2016) Portfolio Selection with a Systematic Skewness Constraint. The North American Journal of Economics and Finance 37(3):393-405.
Kerstens K., Mounir A., Woestyne Van de I. (2011) Geometric Presentation of the Mean-Variance-Skewness Portfolio Frontier Based upon the Shortage Function. European Journal of Operational Research 210(1):81-94.
Kim T. (2015) Does Individual Stock Skewness/Coskewness Reflect Portfolio Risk? Finance Research Letters 15(3):167-174.
Kim W. et al. (2018) Multi-Dimensional Portfolio Risk and Its Diversification: A Note. Global Finance Journal 35(1):147-156.
Lai T. (1991) Portfolio Selection with Skewness: A Multi-Objective Approach. Review of Quantitative Finance and Accounting 1(3):293-305.
Markowitz H. M. (1959) Portfolio Selection: Efficient Diversification of Investments. John Wiley & Sons, Inc., New York; Chapman & Hall, Ltd., London; Cowles Foundation for Research in Economics at Yale University, 344 p.
Mencía J., Sentana E. (2009) Multivariate Location-Scale Mixtures of Normals and Mean-Variance-Skewness Portfolio Allocation. Journal of Econometrics 153(2):105-121.
MSCI (2019) Index Performance. – Morgan Stanley Capital International. https://www.msci.com/end-of-day-data-search.
MSCI (2019) Market Cap Indexes: The MSCI Global Investable MArklet Indexes (GIMI) Methodology. Country Classification. https://www.msci.com/market-cap-weighted-indexes.
Rogach O., Dziuba P. (2017) Exchange Rate Risks of International Portfolio Investments: Comparative Analysis of Ukrainian and other Frontier Markets. Transition Studies Review 24(1):31-45.
Rollinger T., Hoffman S. (2013) Sortino Ratio: A Better Measure of Risk. Review of Futures February 1:40-42.
Rom B. A., Ferguson K. W. (1993) Post-Modern Portfolio Theory Comes of Age. The Journal of Investing 2(4):27-33.
Samuelson P. (1970) The Fundamental Approximation Theorem of Portfolio Analysis in Terms of Means, Variances and Higher Moments. The Review of Economic Studies 37(4):537-542.
Sortino F. A. (2001) From Alpha to Omega. In Managing Downside Risk in Financial Markets: Theory, Practice and Implementation / ed. by F. A. Sortino, S. E. Satchell. Oxford, Boston, Tokyo: Butterworth-Heinemann, 2001. Chapter 1. P. 1-23.
Sortino F. A., Meer R. van der (1991) Downside Risk. The Journal of Portfolio Management 17(4):27-31.
Sortino F. A., Price L. N. (1994) Performance Measurement in a Downside Risk Framework. The Journal of Investing 3(3):59-64.
Sun Q., Yan Y. (2003) Skewness Persistence with Optimal Portfolio Selection. Journal of Banking and Finance 27(6):1111-1121.
Swisher P., Kasten G. (2005) Post-Modern Portfolio Theory. Journal of Financial Planning 18(9):74-85.
Todoni M. (2015) A Post-Modern Portfolio Management Approach on CEE Markets. Procedia Economics and Finance 32(3):1362-1376.
Washer K. M., Johnson R. (2013) An Intuitive Examination of Downside Risk. Journal of Financial Planning 26(6):56-60.
Published
How to Cite
Issue
Section
The author gives permission to Transition Academia Press to publish the article in print and/or electronic format.
If/when an article is accepted for publication, Author will be asked to transfer copyright of the article to Transition Academia Press. Transition Academia Press will retain copyright of all published material and reserves the right to re-use any such material in any print and/or electronic format. Author willing to retain their copyright from the Editors might request a fair condition, on the base of a bilateral agreement.
