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Statistical modelling of asymmetric risk in asset returns

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Author Info

  • J. L. Knight
  • S. E. Satchell
  • K. C. Tran

Abstract

The purpose of this article is to provide a straightforward model for asset returns which captures the fundamental asymmetry in upward versus downward returns. We model this feature by using scale gamma distributions for the conditional distributions of positive and negative returns. By allowing the parameters for positive returns to differ from parameters for negative returns we can test the hypothesis of symmetry. Some applications of this process to expected utility and semi-variance calculations are considered. Finally we estimate the model using daily UK FT100 index and Futures data.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869500000009
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 2 (1995)
Issue (Month): 3 ()
Pages: 155-172

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Handle: RePEc:taf:apmtfi:v:2:y:1995:i:3:p:155-172

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Related research

Keywords: asymmetric returns; FT 100; semi-variance; scale gamma distribution;

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Cited by:
  1. Spyros Skouras, 2001. "Decisionmetrics: A Decision-Based Approach to Econometric Modeling," Working Papers 01-11-064, Santa Fe Institute.
  2. John Knight & Colin Lizieri & Stephen Satchell, 2005. "Diversification When It Hurts? The Joint Distributions of Real Estate and Equity Markets," Real Estate & Planning Working Papers rep-wp2005-16, Henley Business School, Reading University.
  3. Davies, G.B. & Satchell, S.E., 2004. "Continuous Cumulative Prospect Theory and Individual Asset Allocation," Cambridge Working Papers in Economics 0467, Faculty of Economics, University of Cambridge.
  4. Chu, Ba & Knight, John & Satchell, Stephen, 2011. "Large deviations theorems for optimal investment problems with large portfolios," European Journal of Operational Research, Elsevier, vol. 211(3), pages 533-555, June.
  5. Alessio Sancetta, 2004. "Copula Based Monte Carlo Integration in Financial Problems," Working Papers wp04-02, Warwick Business School, Financial Econometrics Research Centre.
  6. Hwang, Soosung & Pedersen, Christian S., 2004. "Asymmetric risk measures when modelling emerging markets equities: evidence for regional and timing effects," Emerging Markets Review, Elsevier, vol. 5(1), pages 109-128, March.
  7. Shaun Bond & Stephen Satchell, 2006. "Asymmetry and downside risk in foreign exchange markets," European Journal of Finance, Taylor and Francis Journals, vol. 12(4), pages 313-332.
  8. Stefania D'Amico, 2005. "Density selection and combination under model ambiguity: an application to stock returns," Finance and Economics Discussion Series 2005-09, Board of Governors of the Federal Reserve System (U.S.).
  9. Stephen E. Satchell & Shaun A. Bond, 2004. "Asymmetry, Loss Aversion and Forecasting," Econometric Society 2004 Australasian Meetings 160, Econometric Society.
  10. Stephen Satchell & George Christodoulakis, 1996. "The Simulation of Option Prices with Application to LIFFE Options on Futures," Archive Working Papers 007, Birkbeck, Department of Economics, Mathematics & Statistics.
  11. Davies, G.B. & Satchell, S.E., 2004. "The Behavioural Components of Risk Aversion," Cambridge Working Papers in Economics 0458, Faculty of Economics, University of Cambridge.
  12. Farah, N. & Satchell, S.E., 2003. "A Loss Aversion Performance Measure," Cambridge Working Papers in Economics 0333, Faculty of Economics, University of Cambridge.
  13. Stephen Satchell & David Damant & Soosung Hwang, 2000. "Exponential risk measure with application to UK asset allocation," Applied Mathematical Finance, Taylor and Francis Journals, vol. 7(2), pages 127-152.
  14. Emmanuel Acar & Stephen Satchell, 1997. "A theoretical analysis of trading rules: an application to the moving average case with Markovian returns," Applied Mathematical Finance, Taylor and Francis Journals, vol. 4(3), pages 165-180.
  15. Stefania D'Amico, 2004. "Density Estimation and Combination under Model Ambiguity," Computing in Economics and Finance 2004 273, Society for Computational Economics.

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