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A note on portfolios of averages of lognormal variables

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  • Boyle, Phelim
  • Jiang, Ruihong

Abstract

This paper establishes conditions under which a portfolio consisting of the averages of K blocks of lognormal variables converges to a K-dimensional lognormal variable as the number of variables in each block increases. The associated block covariance matrix has to have a special structure where the correlations and variances within the block submatrices are equal. We show why the variance homogeneity assumption plays a key role in the derivation.

Suggested Citation

  • Boyle, Phelim & Jiang, Ruihong, 2023. "A note on portfolios of averages of lognormal variables," Insurance: Mathematics and Economics, Elsevier, vol. 112(C), pages 97-109.
    • Handle: RePEc:eee:insuma:v:112:y:2023:i:c:p:97-109
    DOI: 10.1016/j.insmatheco.2023.06.001
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    References listed on IDEAS

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    1. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
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    4. Asmussen, Søren, 2018. "Conditional Monte Carlo for sums, with applications to insurance and finance," Annals of Actuarial Science, Cambridge University Press, vol. 12(2), pages 455-478, September.
    5. Archil Gulisashvili & Peter Tankov, 2013. "Tail behavior of sums and differences of log-normal random variables," Papers 1309.3057, arXiv.org, revised Jan 2016.
    6. Furman, Edward & Hackmann, Daniel & Kuznetsov, Alexey, 2020. "On log-normal convolutions: An analytical–numerical method with applications to economic capital determination," Insurance: Mathematics and Economics, Elsevier, vol. 90(C), pages 120-134.
    7. Asmussen, Søren & Rojas-Nandayapa, Leonardo, 2008. "Asymptotics of sums of lognormal random variables with Gaussian copula," Statistics & Probability Letters, Elsevier, vol. 78(16), pages 2709-2714, November.
    8. Zdravko I. Botev & Robert Salomone & Daniel Mackinlay, 2019. "Fast and accurate computation of the distribution of sums of dependent log-normals," Annals of Operations Research, Springer, vol. 280(1), pages 19-46, September.
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    More about this item

    Keywords

    Lognormal distribution; Sum of lognormals; Block covariance matrix; Limiting distribution; Moment formulae;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions

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