 Aggregation of preferences for skewed asset returnsFousseni Chabi-Yo, Dietmar P.J. Leisen and Eric Renault Journal of Economic Theory, 2014, vol. 154, issue C, 453-489 Abstract: This paper characterizes the equilibrium demand and risk premiums in the presence of skewness risk. We extend the classical mean-variance two-fund separation theorem to a three-fund separation theorem. The additional fund is the skewness portfolio, i.e. a portfolio that gives the optimal hedge of the squared market return; it contributes to the skewness risk premium through co-variation with the squared market return and supports a stochastic discount factor that is quadratic in the market return. When the skewness portfolio does not replicate the squared market return, a tracking error appears; this tracking error contributes to risk premiums through kurtosis and pentosis risk if and only if preferences for skewness are heterogeneous. In addition to the common powers of market returns, this tracking error shows up in stochastic discount factors as priced factors that are products of the tracking error and market returns. Keywords: Skewness; Portfolio; Aggregation; Stochastic discount factor; Polynomials of pricing factors; Market return (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:154:y:2014:i:c:p:453-489 DOI: 10.1016/j.jet.2014.09.020 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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