Non-Gaussian diversification: When size matters

François Desmoulins-Lebeault and Cécile Kharoubi-Rakotomalala

Journal of Banking & Finance, 2012, vol. 36, issue 7, pages 1987-1996

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.

Keywords: Diversification benefits; Asymmetric diversification; Non-Gaussian distributions (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2012
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