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Views on non-Normal markets [25]

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Bullet points include: Adds complexity and therefore sophistication. And risk of over-fitting, i.e. lack of parsimony! Regimes might be Normal but have different means e.g. ‘normal’ and ‘bear’ regimes of Ang and Bekaert (2002/2004). Which can introduce fat tails and conditional tail correlation effects, as per actual market behaviour. In general, risk-return trade-off dynamics are altered. Optimal (i.e. efficient) portfolios then regime dependent. Therefore also time dependent (and hence more sensitive to transaction costs). Therefore also utility dependent, both re. fat tails and re. inter-temporal utility

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