Modeling Skewness in Portfolio Choice
123 Pages Posted: 29 Nov 2020 Last revised: 4 May 2022
Date Written: April 16, 2022
We investigate how to best model skewness 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 offers 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
Suggested Citation: Suggested Citation