Risk Aversion and Skewness Preference: a comment
Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. Thisfinding is typically interpreted in terms of a risk averse representativeinvestor with a cubic utility function. This comment questions thisinterpretation. We show that the empirical tests fail to impose risk aversionand the implied utility function takes an inverse S-shape. Unfortunately, thefirst-order conditions are not sufficient to guarantee that the market portfoliois the global maximum for an inverse S-shaped utility function, and ourresults suggest that the market portfolio is more likely to represent theglobal minimum than the global maximum. In addition, if we impose riskaversion, then co-skewness has minimal explanatory power.
|Keywords||asset pricing, representative investor, risk aversion, skewness preference, three-moment model|
Post, G.T., & van Vliet, P.. (2003). Risk Aversion and Skewness Preference: a comment (No. ERS-2003-009-F&A). Retrieved from http://hdl.handle.net/1765/319