Conditional Asset Allocation under Non-Normality: How Costly Is the Mean-Variance Criterion?
Details
Serval ID
serval:BIB_006511406CE9
Type
Inproceedings: an article in a conference proceedings.
Collection
Publications
Institution
Title
Conditional Asset Allocation under Non-Normality: How Costly Is the Mean-Variance Criterion?
Title of the conference
European Finance Association Meeting
Address
Moscow, Russia
Publication state
Published
Issued date
2005
Language
english
Abstract
We evaluate how departure from normality may affect the conditional allocation of wealth. The expected utility function is approximated by a fourth-order Taylor expansion that allows for non-normal returns. Market returns are characterized by a joint model that captures the time dependency and the shape of the distribution. We show that under large departure from normality, the mean-variance criterion can lead to portfolio weights that differ significantly from those obtained using the optimal strategy accounting for non-normality. In addition, the opportunity cost for a risk-adverse investor to use the sub-optimal mean-variance criterion can be very large.
Keywords
Volatility, Skewness, Kurtosis, GARCH, model, Multivariate skewed Student-t distribution, Stock returns, Asset allocation, Emerging markets
Create date
09/05/2008 14:06
Last modification date
20/08/2019 13:22