The Stable non-Gaussian Asset Allocation: A Comparison with the Classical Gaussian Approach

Yesim Tokat, Svetlozar T. Rachev and Eduardo Schwartz

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: We analyze a multistage stochastic asset allocation problem with decision rules. The uncertainty is modeled using economic scenarios with Gaussian and stable Paretian non-Gaussian innovations. The optimal allocations under these alternative hypothesis are compared. If the agent has very low or very high risk aversibility, then the Gaussian and stable non-Gaussian scenarios result in similar allocations. When the risk aversion of the agent is between these two extreme cases, then the two distributional assumptions result in very di�erent asset allocations. Our calculations suggest that the allocations may be up to 85% different depending on the level of risk aversion of the agent.

Keywords: dynamic portfolio optimization; stable distribution; scenario (search for similar items in EconPapers)
Date: 2000-01-01
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