Mean Swap Variance, Portfolio Thoery and Asset Pricing

45 Pages Posted: 12 May 2017 Last revised: 9 Jan 2018

See all articles by Victor Chow

Victor Chow

West Virginia University - Department of Finance

Zhan Wang

Research Center of Finance, Shanghai Business School

Date Written: January 3, 2018

Abstract

Superior to the variance, "swap variance (SwV)" summarizes the entire probability distribution of returns and is unbiased to distributional asymmetry. Retaining the same simplicity as mean-variance (MV) model, the efficiency of mean-swap variance (MSwV) is necessary and sufficient conditions for that of stochastic dominance. The SwV is composed of a quadratic volatility and a proxy of asymmetric variation (A). The mean-variance-asymmetry (MVA) analysis, a three-dimensional extension of the classical MV portfolio theory and the CAPM, is consistent with expected utility maximization for all risk-averse investors and those who are downside loss-averse but prefer the prospect of potential upside gains.

Keywords: Mean-Variance, Rational Decision Maker, Symmetry, Swap Variance, Human Decision Maker, Asymmetry, Expected Utility Maximization, Stochastic Dominance, Capital Market Equilibrium, Loss-Aversion, and Gain-Preference

JEL Classification: D81, G02, G11, G12

Suggested Citation

Chow, Victor and Wang, Zhan, Mean Swap Variance, Portfolio Thoery and Asset Pricing (January 3, 2018). Available at SSRN: https://ssrn.com/abstract=2965848 or http://dx.doi.org/10.2139/ssrn.2965848

Victor Chow (Contact Author)

West Virginia University - Department of Finance ( email )

P. O. Box 6025
Morgantown, WV 26506
United States

Zhan Wang

Research Center of Finance, Shanghai Business School ( email )

2271 West Zhong Shan Road
Shanghai, Shanghai 200235
China

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