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The Entrenched Kurtosis in Current Portfolio Returns

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  • Xanthopoulos, Apostolos

Abstract

Responses of asset returns to indices introduce kurtosis in portfolio returns. Preoccupation with ‘tail-risk’ entails modeling portfolio exposure to second and fourth moment deviations around the mean return. For quadratic utility optimizers, kurtosis aversion could be viewed as either platykurtosis-seeking or leptokurtosis-aversion. The investor observes kurtosis and operates at a ‘prudent’ trade-off between it and variance, leading to abrupt adjustments. Combined risk tolerance mitigates his response, as weights are adjusted in comparison to rolling deviations of mean-variance portfolio returns from normality. Maintaining value through the crisis is achieved by abrupt changes in consistent kurtosis, and moderation once the latter become entrenched.

Suggested Citation

  • Xanthopoulos, Apostolos, 2012. "The Entrenched Kurtosis in Current Portfolio Returns," The Journal of Economic Asymmetries, Elsevier, vol. 9(2), pages 77-97.
    • Handle: RePEc:eee:joecas:v:9:y:2012:i:2:p:77-97
    DOI: 10.1016/j.jeca.2012.02.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Quadratic Utility Function; Nonlinear Asset Response; Portfolio Kurtosis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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