Abstract

This study investigates how deviations from normality affect asset choices made by risk managers. This study applies the Gram-Charlier expansion for negatively skewed and excess kurtosis. Following Basak and Shapiro (2001), this study examines how negatively skewed and excess kurtosis affects asset allocations when investors manage market-risk exposure using Value-at-Risk-based risk management (VaR-RM). It is important for risk managers to precisely forecast the loss. The analytical results imply that the impact of leptokurtic asset returns is based on the shape of asset returns, and a correct measurement of leptokurtic asset returns is helpful to risk managers seeking to precisely forecast the loss. A risk manager cannot reduce the loss in bad states, but can reduce the value of α, the probability that a loss exceeds VaR, and the agent will suffer from reduced terminal wealth in both the good and bad states.