Unequal Returns: Using the Atkinson Index to Measure Financial Risk

61 Pages Posted: 1 Dec 2017 Last revised: 30 Jan 2019

See all articles by Thomas Fischer

Thomas Fischer

Lund University - School of Economics and Management; Darmstadt University of Technology

Frederik Lundtofte

Lund University - Department of Economics

Date Written: January 14, 2019

Abstract

We apply the Atkinson (1970) inequality index to time series of asset returns to offer a novel measure of financial risk consistent with expected-utility theory. This measure is converted to a certainty-equivalent return serving as a performance measure. We extend the Atkinson index to HARA utility and derive closed-form solutions to our measures for a number of preference-return combinations. Further, we establish relationships between risk aversion and the weights assigned to the cumulants of the return distribution for our performance measure. Using data from hedge funds and asset-pricing anomalies, we find that our performance measure contains additional, economically meaningful information.

Keywords: risk, performance, non-Gaussian distributions, cumulants, hedge funds

JEL Classification: G11

Suggested Citation

Fischer, Thomas and Lundtofte, Frederik, Unequal Returns: Using the Atkinson Index to Measure Financial Risk (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=3078580 or http://dx.doi.org/10.2139/ssrn.3078580

Thomas Fischer

Lund University - School of Economics and Management ( email )

Tycho Brahes väg 1,
S-220 07 Lund, 223 63
Sweden

Darmstadt University of Technology ( email )

Darmstadt, Hesse D-64289
Germany

Frederik Lundtofte (Contact Author)

Lund University - Department of Economics ( email )

P.O. Box 7082
Lund
Sweden
+46 46 222 4970 (Phone)
+46 46 222 4118 (Fax)

HOME PAGE: http://www.nek.lu.se/nekflu

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
83
Abstract Views
536
rank
335,064
PlumX Metrics