Modeling Skewness in Portfolio Choice

123 Pages Posted: 29 Nov 2020 Last revised: 18 Nov 2021

See all articles by Trung H. Le

Trung H. Le

State Bank of Vietnam - Banking Academy of Vietnam

Apostolos Kourtis

University of East Anglia (UEA) - Norwich Business School

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School

Date Written: November 17, 2021

Abstract

Despite half a century of research, we still do not know the best way to model skewness of financial returns. We address this question by comparing the predictive ability and associated portfolio performance of several prominent skewness models in a sample of ten international equity market indices. Models that employ information from the option markets provide the best outcomes overall. We propose an option-based model that accounts for the skewness risk premium. This model 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

Le, Trung H. and Kourtis, Apostolos and Markellos, Raphael N., Modeling Skewness in Portfolio Choice (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3708200 or http://dx.doi.org/10.2139/ssrn.3708200

Trung H. Le

State Bank of Vietnam - Banking Academy of Vietnam ( email )

No.12, Chuaboc Street
Dong Da District
Hanoi, Hanoi 10000
Vietnam

Apostolos Kourtis (Contact Author)

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

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