The Impact of Skewness and Fat Tails on the Asset Allocation Decision

Posted: 13 Apr 2011  

James X. Xiong

Ibbotson Associates

Thomas Idzorek

Ibbotson Associates - A Morningstar Company

Date Written: April, 11 2011

Abstract

The authors modeled the non-normal returns of multiple asset classes by using a multivariate truncated Lévy flight distribution and incorporating non-normal returns into the mean-conditional value at risk (M-CVaR) optimization framework. In a series of controlled optimizations, they found that both skewness and kurtosis affect the M-CVaR optimization and lead to substantially different allocations than do the traditional mean–variance optimizations. They also found that the M-CVaR optimization would have been beneficial during the 2008 financial crisis.

Keywords: Portfolio Management: Asset Allocation, Quantitative Methods, Basic Statistical and Probability Concepts, Measures of Kurtosis, Measures of Skewness

Suggested Citation

Xiong, James X. and Idzorek, Thomas, The Impact of Skewness and Fat Tails on the Asset Allocation Decision (April, 11 2011). Financial Analysts Journal, Vol. 67, No. 2, 2011. Available at SSRN: https://ssrn.com/abstract=1807264

James X. Xiong (Contact Author)

Ibbotson Associates ( email )

United States

Thomas Idzorek

Ibbotson Associates - A Morningstar Company ( email )

225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
312 696-6840 (Phone)
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