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

Posted: 13 Apr 2011

See all articles by James X. Xiong

James X. Xiong

Morningstar Investment Management

Thomas M. Idzorek

Morningstar Investment Management

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)

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States

Thomas Idzorek

Morningstar Investment Management ( email )

22 W Washington Street
Chicago, IL 60602
United States

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