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Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation

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  • Mencía, Javier
  • Sentana, Enrique

Abstract

We show that the distribution of any portfolio whose components jointly follow a location-scale mixture of normals can be characterised solely by its mean, variance and skewness. Under this distributional assumption, we derive the mean-variance-skewness frontier in closed form, and show that it can be spanned by three funds. For practical purposes, we derive a standardised distribution, provide analytical expressions for the log-likelihood score and explain how to evaluate the information matrix. Finally, we present an empirical application in which we obtain the mean-variance-skewness frontier generated by the ten Datastream US sectoral indices, and conduct spanning tests.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 153 (2009)
Issue (Month): 2 (December)
Pages: 105-121

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Handle: RePEc:eee:econom:v:153:y:2009:i:2:p:105-121

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Web page: http://www.elsevier.com/locate/jeconom

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Keywords: Generalised hyperbolic distribution Maximum likelihood Portfolio frontiers Sortino ratio Spanning tests Tail dependence;

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