A Generalized Measure of Riskiness

Turan G. Bali (), Nusret Cakici () and Fousseni Chabi-Yo ()
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Turan G. Bali: McDonough School of Business, Georgetown University, Washington, DC 20057
Nusret Cakici: Graduate School of Business, Fordham University, New York, New York 10023
Fousseni Chabi-Yo: Fisher College of Business, Ohio State University, Columbus, Ohio 43210

Management Science, 2011, vol. 57, issue 8, 1406-1423

Abstract: This paper proposes a generalized measure of riskiness that nests the original measures pioneered by Aumann and Serrano (Aumann, R. J., R. Serrano. 2008. An economic index of riskiness. J. Political Econom. 116(5) 810-836) and Foster and Hart (Foster, D. P., S. Hart. 2009. An operational measure of riskiness. J. Political Econom. 117(5) 785-814). The paper introduces the generalized options' implied measure of riskiness based on the risk-neutral return distribution of financial securities. It also provides asset allocation implications and shows that the forward-looking measures of riskiness successfully predict the cross section of 1-, 3-, 6-, and 12-month-ahead risk-adjusted returns of individual stocks. The empirical results indicate that the generalized measure of riskiness is able to rank equity portfolios based on their expected returns per unit of risk and hence yields a more efficient strategy for maximizing expected return of the portfolio while minimizing its risk. This paper was accepted by Wei Xiong, finance.

Keywords: riskiness; economic index of riskiness; operational measure of riskiness; risk-neutral measures; stock returns (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (35)

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