TY - JOUR
T1 - Risk aversion and skewness preference
AU - Post, Thierry
AU - van Vliet, Pim
AU - Levy, Haim
N1 - Funding Information:
We thank Marien de Gelder for programming assistance. We appreciate the comments by two anonymous referees, Winfried Hallerbach, Jan van der Meulen, Nico van der Sar and Jaap Spronk, as well as participants at the 30th and 32th meeting of the EURO Working Group on Financial Modeling, FMA European conference 2003 Dublin, and seminars at Catholic University of Leuven, Erasmus University Rotterdam, Ghent University and Maastricht University. Financial support by Tinbergen Institute, Erasmus Research Institute of Management and Erasmus Center of Financial Research is gratefully acknowledged. Any remaining errors are our own.
PY - 2008/7
Y1 - 2008/7
N2 - Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. This finding is typically interpreted in terms of a risk averse representative investor with a cubic utility function. This paper questions this interpretation. We show that the empirical tests fail to impose risk aversion and the implied utility function takes an inverse S-shape. Unfortunately, the first-order conditions are not sufficient to guarantee that the market portfolio is the global maximum for this utility function, and our results suggest that the market portfolio is more likely to represent the global minimum. In addition, if we do impose risk aversion, then co-skewness has minimal explanatory power.
AB - Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. This finding is typically interpreted in terms of a risk averse representative investor with a cubic utility function. This paper questions this interpretation. We show that the empirical tests fail to impose risk aversion and the implied utility function takes an inverse S-shape. Unfortunately, the first-order conditions are not sufficient to guarantee that the market portfolio is the global maximum for this utility function, and our results suggest that the market portfolio is more likely to represent the global minimum. In addition, if we do impose risk aversion, then co-skewness has minimal explanatory power.
KW - 3M CAPM
KW - Asset pricing
KW - Asymmetry
KW - Co-skewness
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U2 - 10.1016/j.jbankfin.2006.02.008
DO - 10.1016/j.jbankfin.2006.02.008
M3 - Article
AN - SCOPUS:43949084402
SN - 0378-4266
VL - 32
SP - 1178
EP - 1187
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 7
ER -