Toker Doganoglu () (University of Munich) Christoph Hartz () (University of Munich) Stefan Mittnik () (University of Munich, Center for Financial Studies and ifo)
Abstract
Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable.
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Publisher Info
Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2006/24.
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