Template-Type: ReDIF-Paper 1.0
Author-Name: Post, G.T.
Author-Name-Last: Post
Author-Name-First: Thierry
Author-Name: van Vliet, P.
Author-Name-Last: van Vliet
Author-Name-First: Pim
Author-Person: pvl6
Title: Risk Aversion and Skewness Preference: a comment
Abstract: 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.
Creation-Date: 2003-04-29
File-URL: https://repub.eur.nl/pub/319/ERS-2003-009-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2003-009-F&A
Classification-JEL: C19, G3, M, M41
Keywords: asset pricing, representative investor, risk aversion, skewness preference, three-moment model
Handle: RePEc:ems:eureri:319