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Quantifying the non-Gaussian gain

Author

Listed:
  • David Allen

    (Plato Investment Management
    Honorary Associate of the University of Technology)

  • Stephen Satchell

    (Trinity College, University of Cambridge)

  • Colin Lizieri

    (University of Cambridge)

Abstract

In this paper, we quantify the economic gain from accounting for departures from normality for the mean-variance (MV) investor. We provide two models that account for the key empirical regularities of financial returns: stochastic volatility, asymmetric returns, heavy tails and tail dependence. We show that accounting for departures from normality leads to significant gains in expected utility commensurate with or exceeding typical active management fees. The majority of the uplift in expected utility derives from accounting for stochastic volatility.

Suggested Citation

  • David Allen & Stephen Satchell & Colin Lizieri, 2024. "Quantifying the non-Gaussian gain," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 1-18, February.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:1:d:10.1057_s41260-023-00338-9
    DOI: 10.1057/s41260-023-00338-9
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