A Simple Skewed Distribution with Asset Pricing Applications
Review of Finance, Forthcoming
53 Pages Posted: 18 Aug 2015 Last revised: 28 Jul 2016
Date Written: July 6, 2016
Recent research has identified skewness and downside risk as one of the most important features of risk. We present a new distribution which makes modeling skewed risks no more difficult than normally distributed (symmetric) risks. Our distribution is a combination of the "downside" and "upside" half of two normal distributions, and its parameters can be calculated in closed-form to match a given mean, variance, and skewness. Value-at-risk, expected shortfall, portfolio weights, and risk premia have simple expressions for our distribution and show economically meaningful deviations from the normal case already for very modest levels of skewness. An empirical application suggests that our distribution fits the data well.
Keywords: Skewness, Value-at-Risk, Expected Shortfall, Portfolio Choice, Asset Pricing
JEL Classification: G10, G11
Suggested Citation: Suggested Citation