Portfolio optimization under a generalized hyperbolic skewed t distribution and exponential utility

John Birge and Luis Chavez-Bedoya

Quantitative Finance, 2016, vol. 16, issue 7, 1019-1036

Abstract: In this paper, we show that if asset returns follow a generalized hyperbolic skewed t distribution, the investor has an exponential utility function and a riskless asset is available, the optimal portfolio weights can be found either in closed form or using a successive approximation scheme. We also derive lower bounds for the certainty equivalent return generated by the optimal portfolios. Finally, we present a study of the performance of mean--variance analysis and Taylor’s series expected utility expansion (up to the fourth moment) to compute optimal portfolios in this framework.

Date: 2016
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DOI: 10.1080/14697688.2015.1113307

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