N°18-65: Portfolio Choice When Stock Returns May Disappoint: An Empirical Analysis Based on L-Moments

We develop a novel estimation method based on L-moments of stock returns. L-moments have the same interpretation of conventional moments but are linear in the data and therefore robust to outliers. The estimation method provides a series expansion that quickly converges to the return distribution. We apply the method to assess empirically the equity portfolio choice of investors with generalized disappointment aversion (GDA) preferences. Using the novel method, GDA investors achieve, out-of-sample, substantial utility gains. Unlike alternative methods, our method generates low-volatility portfolio returns, copes well with estimation risk, and exploits the information content of L-moments beyond order four.