Modeling Skewness in Portfolio Choice

Abstract

We seek the best skewness models for portfolio choice decisions. To this end, we
compare the predictive ability and portfolio performance of several prominent skewness
models in a sample of ten international equity market indices. Overall, models that
employ information from the option markets outperform models that only rely on
stock returns. We propose an option-based skewness estimator that accounts for the
skewness risk premium. This estimator oers the most informative forecasts of future
skewness, the lowest prediction errors and the best portfolio performance in most of
our tests.

Keywords: Skewness modeling, Skewness Risk Premium, Portfolio choice

JEL Classification: G11, C58