Posted: 13 Apr 2011
Date Written: April, 11 2011
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: 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