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Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing

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Author Info
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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File URL: http://www.bankofcanada.ca/en/res/wp/2007/wp07-47.pdf
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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
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Handle: RePEc:bca:bocawp:07-47

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Related research
Keywords: Financial markets; Market structure and pricing;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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