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Non-Gaussian diversification: When size matters

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

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.

Suggested Citation

  • Desmoulins-Lebeault, François & Kharoubi-Rakotomalala, Cécile, 2012. "Non-Gaussian diversification: When size matters," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1987-1996.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:1987-1996
    DOI: 10.1016/j.jbankfin.2012.03.006
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    6. 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.

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    More about this item

    Keywords

    Diversification benefits; Asymmetric diversification; Non-Gaussian distributions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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