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A Generalized Measure of Riskiness

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Author Info

  • 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)

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    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.1110.1373
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 8 (August)
    Pages: 1406-1423

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:8:p:1406-1423

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    Related research

    Keywords: riskiness; economic index of riskiness; operational measure of riskiness; risk-neutral measures; stock returns;

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    Cited by:
    1. Hellmann, Tobias & Riedel, Frank, 2013. "The Foster-Hart Measure of Riskiness for General Gambles," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79752, Verein für Socialpolitik / German Economic Association.
    2. Alejandro Balbás & Beatriz Balbás & Raquel Balbás, 2011. "CAPM-like formulae and good deal absence with ambiguous setting and coherent risk measure," Business Economics Working Papers id-11-04, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
    3. Chamorro Elosua, Arritokieta & Usategui Díaz de Otalora, José María, . "A Note on Risk Acceptance, Bankruptcy Avoidance and Riskiness Measures," DFAEII Working Papers DFAEII;2013-04, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Bali, Turan G. & Cakici, Nusret & Chabi-Yo, Fousseni, 2012. "Does Aggregate Riskiness Predict Future Economic Downturns?," Working Paper Series 2012-09, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    5. Schulze, Klaas, 2014. "Existence and computation of the Aumann–Serrano index of riskiness and its extension," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 219-224.
    6. Alejandro Balbás & Beatriz Balbás & Raquel Balbás, 2013. "On the inefficiency of Brownian motions and heavier tailed price processes," Business Economics Working Papers id-13-01, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
    7. Chen, Yi-Ting & Ho, Keng-Yu & Tzeng, Larry Y., 2014. "Riskiness-minimizing spot-futures hedge ratio," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 154-164.

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