The stable non-Gaussian asset allocation: a comparison with the classical Gaussian approach

✍ Scribed by Yesim Tokat; Svetlozar T. Rachev; Eduardo S. Schwartz

• Book ID: 104293296
• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 268 KB
• Volume: 27
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(02)00050-7

✦ Synopsis

This paper analyzes the asset allocation problem of an investor who can invest in equity and cash when there is time variation in expected returns on the equity. The solution methodology is 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 hypotheses are compared. Our calculations suggest that the asset allocations may be up to 26% di erent depending on the objective function and risk aversion level of the investor. The certainty equivalent return can be improved up to 0.7% by switching to the stable Paretian model. An investor can earn up to eight times as much return on the unit of risk he bears by applying the stable model.