Portfolio optimization for student t and skewed t returns

Wenbo Hu and Alec Kercheval

Quantitative Finance, 2010, vol. 10, issue 1, 91-105

Abstract: It is well-established that equity returns are not Normally distributed, but what should the portfolio manager do about this, and is it worth the effort? It is now feasible to employ better multivariate distribution families that capture heavy tails and skewness in the data; we argue that among the best are the Student t and skewed t distributions. These can be efficiently fitted to data, and show a much better fit to real returns than the Normal distribution. By examining efficient frontiers computed using different distributional assumptions, we show, using for illustration five stocks chosen from the Dow index, that the choice of distribution has a significant effect on how much available return can be captured by an optimal portfolio on the efficient frontier.

Keywords: Portfolio optimization; Portfolio management; Correlation modelling; Risk management; Value at risk; Model estimation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (29)

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DOI: 10.1080/14697680902814225

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