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

In this paper we show that flexible probability distribution functions, in addition to been 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's distributions