A Wholistic Approach to Diversification Management: The Diversification Delta Strategy Applied to Non-Normal Return Distributions

In this paper we study a higher moment diversification measure, the so-called diversification delta (Vermorken et al. (2012)), in a dynamic portfolio optimization context. Particularly, we set up an investment strategy that dynamically maximizes the diversification delta for a given set of assets. Thus, we label the resulting optimized portfolio structure as Maximum Diversification Delta Portfolio (MDDP). Our out-of-sample empirical study reveals that considering crisis-periods, the MDDP is superior to popular investment strategies, such as Minimum-Variance-Portfolio, Risk-Parity-Portfolio and Equally-Weighted-Portfolio, in terms of risk adjusted returns, risk moments and certainty equivalents. However, in line with other diversification measures the MDDP is no longer superior in upward trending markets