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

Yesim Tokat, Svetlozar T. Rachev, Eduardo S. Schwartz

Research output: Contribution to journalArticlepeer-review

31 Scopus citations

Abstract

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% different 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.

Original languageEnglish
Pages (from-to)937-969
Number of pages33
JournalJournal of Economic Dynamics and Control
Volume27
Issue number6
DOIs
StatePublished - Apr 2003

Keywords

  • Asset return
  • Dynamic portfolio optimization
  • Scenario generation
  • Stable distribution

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