Portfolio Optimization Under Generalized Hyperbolic Skewed t Distribution and Exponential Utility

33 Pages Posted: 24 May 2009 Last revised: 14 Jun 2014

John R. Birge

University of Chicago - Booth School of Business

Luis Chavez-Bedoya

Esan Graduate School of Business

Date Written: March 28, 2014

Abstract

In this paper, we show that if asset returns follow a generalized hyperbolic skewed t distribution, the investor has 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.

Keywords: Portfolio Optimization, asymmetrical distribution, utility maximization

JEL Classification: G11

Suggested Citation

Birge, John R. and Chavez-Bedoya, Luis, Portfolio Optimization Under Generalized Hyperbolic Skewed t Distribution and Exponential Utility (March 28, 2014). Available at SSRN: https://ssrn.com/abstract=1409186 or http://dx.doi.org/10.2139/ssrn.1409186

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Luis Chavez-Bedoya (Contact Author)

Esan Graduate School of Business ( email )

Alonso de Molina 1652
Monterrico
Lima, Surco
Peru

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