Portfolio optimization under a generalized hyperbolic skewed t distribution and exponential utility |
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Authors: | John R Birge |
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Institution: | The University of Chicago Booth School of Business, 5807 S. Woodlawn Ave., Chicago, IL, 60637, USA. |
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Abstract: | In this paper, we show that if asset returns follow a generalized hyperbolic skewed t distribution, the investor has an 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. |
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Keywords: | Portfolio optimization Skewed t distribution Mean–variance |
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