Revealed Preferences for Portfolio Selection - Does Skewness Matter?

18 Pages Posted: 7 Aug 2016 Last revised: 25 Nov 2018

See all articles by Merrill W. Liechty

Merrill W. Liechty

Drexel University - Department of Decision Sciences

Ümit Saglam

East Tennessee State University

Date Written: August 1, 2016

Abstract

In this study, we consider two competing methods, traditional mean/variance efficient portfolio and a generalization allowing for skewness as a Bayesian decision problem. Using observed (market) weights we investigate the market’s preference for risk. We do this with bilevel optimization, where the first level maximizes the investor’s objective (utility) function and the second level minimizes the discrepancy between the market and the optimal portfolio weights. This reveals the market’s preference for risk by estimating the implied market utility. Numerical results show that the market’s preferences are better explained when skewness is included.

Keywords: Market preferences, Mean-Variance-Skewness optimal portfolios, Bi-level optimization

JEL Classification: C11, C61, G11

Suggested Citation

Liechty, Merrill W. and Saglam, Ümit, Revealed Preferences for Portfolio Selection - Does Skewness Matter? (August 1, 2016). Applied Economics Letters (2016), Available at SSRN: https://ssrn.com/abstract=2817057 or http://dx.doi.org/10.2139/ssrn.2817057

Merrill W. Liechty

Drexel University - Department of Decision Sciences ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States
215-895-2459 (Phone)
215-895-2907 (Fax)

HOME PAGE: http://www.pages.drexel.edu/~mwl25/

Ümit Saglam (Contact Author)

East Tennessee State University ( email )

Department of Management and Marketing
PO Box 70625
Johnson City, TN 37614
United States
423-439-1000 (Phone)
423-439-4422 (Fax)

HOME PAGE: http://https://sites.google.com/view/umitsaglam/home

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