Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing

Fousseni Chabi-Yo, Dietmar Leisen and Eric Renault

Staff Working Papers from Bank of Canada

Abstract: Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique's (2000) conditional mean-variance-skewness asset pricing model to non-vanishing risk-neutral market variance. The empirical relevance of this extension is documented in the context of the asymmetric GARCH-in-mean model of Bekaert and Liu (2004).

Keywords: Financial markets; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: C52 D58 G11 G12 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2007
New Economics Papers: this item is included in nep-cfn and nep-fmk
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-47

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