A closed-form mean–variance–skewness portfolio strategy

Fang Zhen and Jingnan Chen

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: This paper analyzes portfolio selection problems with multivariate normal-gamma distributed risky returns. We obtain a partial elliptic cone-shaped mean–variance–skewness (MVS) frontier and a closed-form MVS portfolio strategy for investors with a cubic utility function. We show that the utility improvement and Sharpe ratio loss of our MVS strategy relative to the traditional mean–variance strategy depend on the investor’s prudence and risk-aversion levels, and the mean and variance of a max-skewness portfolio. Moreover, we obtain a three-moment capital asset pricing model, and propose a max-skewness factor in addition to the market factor.

Keywords: Asymmetry; Normal-gamma distribution; Mean–variance–skewness frontier; Portfolio strategy; Three-moment capital asset pricing model (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322001957

DOI: 10.1016/j.frl.2022.102933

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