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Non-Gaussian diversification: When size matters

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  • Desmoulins-Lebeault, François
  • Kharoubi-Rakotomalala, Cécile
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    Abstract

    Classical portfolio theory informs investors that they should have a large number of assets in their portfolios in order to diversify risk. We show that the non-Gaussian features of stock return distribution may not allow for this risk protection in times of crisis. Moreover, we demonstrate empirically that, if investors are risk-averse and consider higher order moments, they have numerous incentives not to diversify their portfolios fully. This is caused by the evolution of both large losses and asymmetry of returns when the numbers of assets in a portfolio change.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612000672
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 7 ()
    Pages: 1987-1996

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:1987-1996

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Diversification benefits; Asymmetric diversification; Non-Gaussian distributions;

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    References

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    1. William N. Goetzmann & Alok Kumar, 2001. "Equity Portfolio Diversification," NBER Working Papers 8686, National Bureau of Economic Research, Inc.
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    8. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
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    11. Thierry Ane & Cecile Kharoubi, 2003. "Dependence Structure and Risk Measure," The Journal of Business, University of Chicago Press, vol. 76(3), pages 411-438, July.
    12. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
    13. Richardson, Matthew & Smith, Tom, 1993. "A Test for Multivariate Normality in Stock Returns," The Journal of Business, University of Chicago Press, vol. 66(2), pages 295-321, April.
    14. Carol C. Bertaut, 1998. "Stockholding Behavior Of U.S. Households: Evidence From The 1983-1989 Survey Of Consumer Finances," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 263-275, May.
    15. Statman, Meir, 1987. "How Many Stocks Make a Diversified Portfolio?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 353-363, September.
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    Cited by:
    1. Guillén, Montserrat & Sarabia, José María & Prieto, Faustino, 2013. "Simple risk measure calculations for sums of positive random variables," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 273-280.
    2. Delatte, Anne-Laure & Lopez, Claude, 2013. "Commodity and equity markets: Some stylized facts from a copula approach," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5346-5356.
    3. Delatte, A-L. & Lopez, C., 2013. "Commodity and Equity Markets: Some Stylized Facts from a Copula," Working papers 421, Banque de France.

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