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Do investors dislike kurtosis?

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  • Markus Haas

    ()
    (University of Munich)

Abstract

We show that decreasing absolute prudence implies kurtosis aversion. The ``proof''' of this relation is usually based on the identification of kurtosis with the fourth centered moment of the return distribution and a Taylor approximation of the utility function. A more sound analysis is required, however, as such heuristic arguments have been shown to be logically flawed.

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File URL: http://www.accessecon.com/pubs/EB/2007/Volume7/EB-06G00072A.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 7 (2007)
Issue (Month): 2 ()
Pages: 1-9

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Handle: RePEc:ebl:ecbull:eb-06g00072

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  1. Jondeau, E. & Rockinger, M., 2004. "Optimal Portfolio Allocation Under Higher Moments," Working papers 108, Banque de France.
  2. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  3. Jean, William H, 1980. " The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 151-58, March.
  4. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
  5. Robert F. Dittmar, 2002. "Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 57(1), pages 369-403, 02.
  6. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
  7. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  8. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
  9. Vinod, H. D., 2004. "Ranking mutual funds using unconventional utility theory and stochastic dominance," Journal of Empirical Finance, Elsevier, vol. 11(3), pages 353-377, June.
  10. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
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Cited by:
  1. Gulder Kemalbay & C. Murat Ozkut & Ceki Franko, 2011. "Portfolio Selection with Higher Moments: A Polynomial Goal Programming Approach to ISE-30 Index," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 13(1), pages 41-61, Special I.
  2. Eugenio Peluso & Alain Trannoy, 2012. "Preserving dominance relations through disaggregation: the evil and the saint," Social Choice and Welfare, Springer, vol. 39(2), pages 633-647, July.

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