• PORTFOLIO RANKING EFFICIENCY (II) TRUNCATED LÉVY FLIGHT RETURNS

Abstract

The truncated Lévy flight (TLF) distribution is viewed as a sub-family of the bilateral tempered stable class of distributions and studied. The domain of variation between skewness and excess kurtosis is derived and a full analytical solution of the moment equations is displayed. Application to portfolio selection with CARA utility is considered. With the TLF as test return distribution, it is analyzed whether a recent approximate ranking function with cubic mean-variance-skewness-kurtosis trade-off should be preferred to the original Gaussian ranking function with linear mean-variance trade-off or not. Based on an appropriate ranking efficiency measure and an empirical data analysis, one notes a systematic efficiency increase of the approximate ranking versus the Gaussian ranking. Comparisons with the normal variance gamma (NVG) distribution as test return distribution are included.