Portfolio Optimization and Asset Pricing Implications under Returns Non-Normality Concerns

Roméo Tédongap and Jules Tinang

Finance, 2022, vol. 43, issue 1, 47-94

Abstract: We investigate the implications of non-normality for asset allocation and pricing. Asset returns non-normality is captured through a multivariate normal-exponential model; we develop an estimation procedure based on a generalized method of moments. Investors? non-normality concerns are introduced by adding a linear non-normality constraint to an otherwise standard mean-variance framework. The optimal portfolio solution is obtained in closed form and can be reformulated as a three-fund separation strategy. Suboptimal portfolios that ignore non-normality or are naive in terms of diversification may result in important welfare costs as measured by the certainty equivalent, notably for the most risk-tolerant investors who target large non-normality ratios. In equilibrium, expected returns admit a two-beta representation in which the most important beta in explaining their cross-sectional variation is the one capturing non-normality (more than 60%) while the CAPM beta explains less than 12%. JEL Classification: C130, G110, G120

Keywords: endogenous preference parameters; non-participation; efficient frontier (search for similar items in EconPapers)
JEL-codes: C13 G11 G12 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cairn.info/load_pdf.php?ID_ARTICLE=FINA_431_0047 (application/pdf)
http://www.cairn.info/revue-finance-2022-1-page-47.htm (text/html)
restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cai:finpug:fina_431_0047

Access Statistics for this article

More articles in Finance from Presses universitaires de Grenoble
Bibliographic data for series maintained by Jean-Baptiste de Vathaire ().