Risk Aversion and Skewness Preference: a comment
2003-04-29
Research Paper
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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.
- M41 : Accounting
- G3 : Corporate Finance and Governance
- M : Business Administration and Business Economics; Marketing; Accounting
- C19 : Econometric and Statistical Methods: Other
- utility
- portfolio
- market portfolio
- utility function
- market
- condition
- risk aversion
- function
- aversion
- premium
- gamma
- gamma premium
- risk aversion condition
- skewnes
- return
- model
- asset
- result
- utility parameters
- investor
