In search of positive skewness: the case of individual investors

Patrick Roger, Marie-Hélène Broihanne and Maxime Merli

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: In this paper, we first prove analytically that the skewness of returns of portfolios built with Arrow-Debreu securities decreases with diversification. Through simulations, we also show that this result remains true in a financial market with a finite number of states of nature. We then analyze the behavior of over 85,000 individual investors at a large brokerage house. Though the main determinant of underdiversification is the portfolio value we find that the skewness of returns remains significant in explaining diversification after controlling for this value. Moreover, we show that the decrease in skewness induced by diversification is essentially driven by the share of total variance of stock returns due to common factors. These findings extend those of Mitton and Vorkink (2007) and explain the variability over time of the relationship between skewness and diversification.

Keywords: Underdiversification; skewness; individual investors. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2012-04

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