Higher order comoments of multifactor models and asset allocation

•Derivation of higher order comoments (coskewness and cokurtosis matrix) under multifactor model.•Description of portfolio optimization framework using higher order moments.•Out-of-sample performance in international portfolio allocation.

Accurate estimates of the higher order comoments are needed in asset allocation. We derive explicit formulas for the higher order comoments under the assumption that stock returns are generated by a multifactor model and show that this assumption leads to a substantial reduction in the number of parameters to estimate compared to the traditional approach. An out-of-sample analysis of the performance of portfolio allocation criteria that depend on the higher order comoments illustrates the usefulness of the proposed methodology.