Mean Swap Variance, Portfolio Thoery and Asset Pricing
45 Pages Posted: 12 May 2017 Last revised: 9 Jan 2018
Date Written: January 3, 2018
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: Suggested Citation