Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/25490 
Year of Publication: 
2006
Series/Report no.: 
CFS Working Paper No. 2006/24
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat-tailedness of risk factors explicitly into account, while retaining analytical tractability and ease of implementation. An application to a portfolio of nine German DAX stocks illustrates that the model is strongly favored by the data and that it is practically implementable.
Subjects: 
Multivariate Stable Distribution
Index Model
Portfolio Optimization
Value-at- Risk
Model Adequacy
JEL: 
C13
C32
G11
G14
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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