Risk Aversion and Skewness Preference: A Comment

19 Pages Posted: 23 Feb 2006  

Thierry Post

Koc University - Graduate School of Business

Pim van Vliet

Robeco Asset Management - Quantitative Strategies

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Date Written: 29 2003 4,

Abstract

Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. Thisfinding is typically interpreted in terms of a risk averse representativeinvestor with a cubic utility function. This comment questions thisinterpretation. We show that the empirical tests fail to impose risk aversionand the implied utility function takes an inverse S-shape. Unfortunately, thefirst-order conditions are not sufficient to guarantee that the market portfoliois the global maximum for an inverse S-shaped utility function, and ourresults suggest that the market portfolio is more likely to represent theglobal minimum than the global maximum. In addition, if we impose riskaversion, then co-skewness has minimal explanatory power.

Keywords: asset pricing, risk aversion, skewness preference, representative investor, three-moment model

JEL Classification: M, M41, G3, C19

Suggested Citation

Post, Thierry and van Vliet, Pim and Levy, Haim, Risk Aversion and Skewness Preference: A Comment (29 2003 4,). ; Journal of Banking and Finance, Vol. 32, No. 7, pp. 1178-1187, 2008. Available at SSRN: https://ssrn.com/abstract=411660

Thierry Post (Contact Author)

Koc University - Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sariyer
Istanbul
Turkey

Pim Van Vliet

Robeco Asset Management - Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

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