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

Eric Jondeau and Michael Rockinger (michael.rockinger@unil.ch)

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

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.

Keywords: Volatility; Skewness; Kurtosis; GARCH model; Multivariate skewed Student-t distribution; Stock returns; Asset allocation; Emerging markets (search for similar items in EconPapers)
JEL-codes: C22 C51 G12 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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