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Conditional Asset Allocation under Non-Normality: How Costly is the Mean-Variance Criterion?

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  • Eric Jondeau

    ()
    (HEC Lausanne and FAME)

  • Michael Rockinger

    ()
    (HEC Lausanne and FAME)

Abstract

We evaluate how departure from normality may affect the conditional allocation of wealth. The expected utility function is approximated by a forth-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 signifficantly 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.

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Bibliographic Info

Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp132.

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Date of creation: Feb 2005
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Handle: RePEc:fam:rpseri:rp132

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Keywords: Volatility; Skewness; Kurtosis; GARCH model; Multivariate skewed Student-t distribution; Stock returns; Asset allocation; Emerging markets;

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Cited by:
  1. repec:ebl:ecbull:v:7:y:2007:i:2:p:1-9 is not listed on IDEAS
  2. M. Angeles Carnero Fernández & M. Hakan Eratalay, 2012. "Estimating VAR-MGARCH models in multiple steps," Working Papers. Serie AD 2012-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Del Brio, Esther B. & Ñíguez, Trino-Manuel & Perote, Javier, 2011. "Multivariate semi-nonparametric distributions with dynamic conditional correlations," International Journal of Forecasting, Elsevier, vol. 27(2), pages 347-364.

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