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The Economic Value of Distributional Timing

Author

Listed:
  • Eric Jondeau

    (University of Lausanne and Swiss Finance Institute)

  • Michael Rockinger

    (University of Lausanne and Swiss Finance Institute)

Abstract

We evaluate how non-normality of asset returns and the temporal evolution of volatility and higher moments affects the conditional allocation of wealth. We show that if one neglects these aspects, as would be the case in a mean variance allocation, a significant cost would arise. The performance fee the investor is willing to pay to benefit from our allocation is as high as the fee she is willing to pay to benefit from volatility timing. Many tests of robustness are performed, yet, the economic value of taking the non-normality and the temporal evolution of the distribution into account remains.

Suggested Citation

  • Eric Jondeau & Michael Rockinger, 2006. "The Economic Value of Distributional Timing," Swiss Finance Institute Research Paper Series 06-35, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:0635
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    File URL: http://ssrn.com/abstract=957514
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    Citations

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    Cited by:

    1. Luis García-Álvarez & Richard Luger, 2011. "Dynamic Correlations, Estimation Risk, and Porfolio Management During the Financial Crisis," Working Papers wp2011_1103, CEMFI, revised Sep 2011.
    2. Marie Briere & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, ULB -- Universite Libre de Bruxelles.
    3. Dimitrios Thomakos & Johannes Klepsch & Dimitris N. Politis, 2020. "Model Free Inference on Multivariate Time Series with Conditional Correlations," Stats, MDPI, vol. 3(4), pages 1-26, November.
    4. Campbell Harvey & John Liechty & Merrill Liechty & Peter Muller, 2010. "Portfolio selection with higher moments," Quantitative Finance, Taylor & Francis Journals, vol. 10(5), pages 469-485.
    5. Tsunehiro Ishihara & Yasuhiro Omori, 2017. "Portfolio optimization using dynamic factor and stochastic volatility: evidence on Fat-tailed errors and leverage," The Japanese Economic Review, Japanese Economic Association, vol. 68(1), pages 63-94, March.

    More about this item

    Keywords

    Non-normality; volatility timing; distributional timing; GARCH; portfolio allocation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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