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Multivariate Location-Scale Mixtures Of Normals And Mean-Variance-Skwness Portfolio Allocation

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  • Enrique Sentana

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

  • Javier Mencía

    ()
    (Banco de España)

Abstract

We show that the distribution of any portfolio whose components jointly follow a location-scale mixture of normals can be characterised solely by its mean, variance and skewness. Under this distributional assumption, we derive the mean-varianceskewness frontier in closed form, and show that it can be spanned by three funds. For practical purposes, we derive a standardised distribution, provide analytical expressions for the log-likelihood score and explain how to evaluate the information matrix. Finally, we present an empirical application in which we obtain the meanvariance-skewness frontier generated by the ten Datastream US sectoral indices, and conduct spanning tests.

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Bibliographic Info

Paper provided by CEMFI in its series Working Papers with number wp2008_0805.

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Date of creation: Apr 2008
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Handle: RePEc:cmf:wpaper:wp2008_0805

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Keywords: Generalised hyperbolic distribution; maximum likelihood; portfolio frontiers; spanning tests; tail dependence.;

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