Arbitrage Equilibrium with Skewed Asset Returns

Giovanni Barone-Adesi

Journal of Financial and Quantitative Analysis, 1985, vol. 20, issue 3, 299-313

Abstract: The quadratic form of the covariance-co-skewness model by Kraus and Litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns. Empirical tests similar to the ones in Black-Jensen-Scholes and Gibbons are discussed. The empirical estimates give some support to the Kraus-Litzenberger hypothesis on skewness preference. However, there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing.

Date: 1985
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