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Exponential risk measure with application to UK asset allocation

Author

Listed:
  • Stephen Satchell
  • David Damant
  • Soosung Hwang

Abstract

In the paper the exponential risk measure of Damant and Satchell is used to formulate an investor's utility function and the properties of this function are investigated. The utility function is calibrated for a typical UK investor who would hold different proportions of equity. It is found that, for plausible parameter values, a typical UK investor will hold more equity under the assumption of non-normality of return if his utility function has the above formulation and not the standard mean-variance utility function. Furthermore, our utility function is consistent with positive skewness affection and kurtosis aversion. Some aggregate estimates of risk parameters are calculated for the typical UK investor. These do not seem well determined, raising issues of the roles of aggregation and wealth in this model.

Suggested Citation

  • Stephen Satchell & David Damant & Soosung Hwang, 2000. "Exponential risk measure with application to UK asset allocation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(2), pages 127-152.
    • Handle: RePEc:taf:apmtfi:v:7:y:2000:i:2:p:127-152
    DOI: 10.1080/13504860010014502
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    References listed on IDEAS

    as
    1. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
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    5. Chamberlain, Gary, 1983. "A characterization of the distributions that imply mean--Variance utility functions," Journal of Economic Theory, Elsevier, vol. 29(1), pages 185-201, February.
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    7. J. L. Knight & S. E. Satchell & K. C. Tran, 1995. "Statistical modelling of asymmetric risk in asset returns," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(3), pages 155-172.
    8. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-317, June.
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    Cited by:

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    2. Lambert, M. & Hübner, G., 2013. "Comoment risk and stock returns," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 191-205.

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