Modeling Skewness in Portfolio Choice

123 Pages Posted: 29 Nov 2020 Last revised: 4 May 2022

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: April 16, 2022

Abstract

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

Le, Trung H. and Kourtis, Apostolos and Markellos, Raphael N., Modeling Skewness in Portfolio Choice (April 16, 2022). 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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