Quantifying the non-Gaussian gain

David Allen, Stephen Satchell () and Colin Lizieri
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David Allen: Plato Investment Management
Stephen Satchell: Trinity College, University of Cambridge

Journal of Asset Management, 2024, vol. 25, issue 1, No 1, 18 pages

Abstract: Abstract In this paper, we quantify the economic gain from accounting for departures from normality for the mean-variance (MV) investor. We provide two models that account for the key empirical regularities of financial returns: stochastic volatility, asymmetric returns, heavy tails and tail dependence. We show that accounting for departures from normality leads to significant gains in expected utility commensurate with or exceeding typical active management fees. The majority of the uplift in expected utility derives from accounting for stochastic volatility.

Keywords: Asset allocation; Non-normality; Asymmetry; Tail dependence; Expected utility (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-023-00338-9

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