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Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing

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  • Fousseni Chabi-Yo
  • Dietmar Leisen
  • Eric Renault

Abstract

Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique's (2000) conditional mean-variance-skewness asset pricing model to non-vanishing risk-neutral market variance. The empirical relevance of this extension is documented in the context of the asymmetric GARCH-in-mean model of Bekaert and Liu (2004).

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 07-47.

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Length: 53 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-47

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Keywords: Financial markets; Market structure and pricing;

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