Risk Aversion and Skewness Preference: A Comment
Koc University - Graduate School of Business
Pim van Vliet
Robeco Asset Management - Quantitative Strategies
Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University
29 2003 4,
ERIM Report Series Reference No. ERS-2003-009-F&A
Journal of Banking and Finance, Vol. 32, No. 7, pp. 1178-1187, 2008
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.
Number of Pages in PDF File: 19
Keywords: asset pricing, risk aversion, skewness preference, representative investor, three-moment model
JEL Classification: M, M41, G3, C19
Date posted: February 23, 2006
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