Location-scale portfolio selection with factor-recentered skew normal asset returns

Quan Gan

Journal of Economic Dynamics and Control, 2014, vol. 48, issue C, 176-187

Abstract: This paper analyzes the single period portfolio selection problem on the location-scale return family. The skew normal distribution, after recentering and reparameterization, is shown to be in this family. The recentered and reparameterized distribution, called factor-recentered skew normal, can be expressed as a skew factor model which is characterized by a location parameter and two scale parameters. Risk preference on scale parameter is non-monotonic and risk averse investors prefer larger (smaller) scale when the scale is negative (positive). The three-parameter efficient set is a part of conical surface bounded by two lines. Positive-skewness portfolios and negative-skewness portfolios do not coexist in the efficient set. Numerical cases under constant absolute risk aversion are analyzed with its closed-form certainty equivalent. An asset pricing formula which nests the CAPM is obtained.

Keywords: Portfolio selection; Skew normal; Certainty equivalent; Non-monotonicity; Factor model (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
Date: 2014
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:dyncon:v:48:y:2014:i:c:p:176-187

DOI: 10.1016/j.jedc.2014.09.002

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