Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098529 | Journal of Economic Dynamics and Control | 2014 | 12 Pages |
Abstract
This paper analyzes the single period portfolio selection problem on the location-scale return family. The skew normal distribution, after recentering and reparameterization, is shown to be in this family. The recentered and reparameterized distribution, called factor-recentered skew normal, can be expressed as a skew factor model which is characterized by a location parameter and two scale parameters. Risk preference on scale parameter is non-monotonic and risk averse investors prefer larger (smaller) scale when the scale is negative (positive). The three-parameter efficient set is a part of conical surface bounded by two lines. Positive-skewness portfolios and negative-skewness portfolios do not coexist in the efficient set. Numerical cases under constant absolute risk aversion are analyzed with its closed-form certainty equivalent. An asset pricing formula which nests the CAPM is obtained.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Quan Gan,