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

Listed author(s):
  • Eric Jondeau

    ()

    (HEC Lausanne and FAME)

  • Michael Rockinger

    ()

    (HEC Lausanne and FAME)

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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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
Handle: RePEc:fam:rpseri:rp132
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