Rolling the Skewed Die: Economic Foundations of the Demand for Skewness

64 Pages Posted: 10 May 2018

See all articles by Suk Lee

Suk Lee

University of Southern California, Marshall School of Business

Fernando Zapatero

Questrom School of Business, Boston University

Aleksandar Giga

University of Southern California

Date Written: April 23, 2018

Abstract

Skewness is pervasive across financial instruments, and the literature has documented that many investors seek idiosyncratic skewness in their portfolios. In response, there are some theoretical models that study implications of the preference for skewness, but using utility functions where the preference for right skewness is hard-wired. Drawing from status concerns, we derive a utility function reminiscent of Friedman and Savage (1948) that leads the investor to demand skewness --right or left skewness. We then consider a parsimonious set of securities that allow the investor to select the exact optimal level of right or left skewness. Our analysis yields a rich set of results broadly consistent with empirical observations.

Keywords: endogenous demand for skewness, utility function, aspiration, status

JEL Classification: G02, G11

Suggested Citation

Lee, Suk and Zapatero, Fernando and Giga, Aleksandar, Rolling the Skewed Die: Economic Foundations of the Demand for Skewness (April 23, 2018). Available at SSRN: https://ssrn.com/abstract=3168944 or http://dx.doi.org/10.2139/ssrn.3168944

Suk Lee (Contact Author)

University of Southern California, Marshall School of Business ( email )

Los Angeles, CA
United States

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

Aleksandar Giga

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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