Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach
AbstractThis paper proposes a nonparametric efficiency measurement approach for the static portfolio selection problem in mean-variance-skewness space. A shortage function is defined that looks for possible increases in return and skewness and decreases in variance. Global optimality is guaranteed for the resulting optimal portfolios. We also establish a link to a proper indirect mean-variance-skewness utility function. For computational reasons, the optimal portfolios resulting from this dual approach are only locally optimal. This framework permits to differentiate between portfolio efficiency and allocative efficiency, and a convexity efficiency component related to the difference between the primal, non-convex approach and the dual, convex approach. Furthermore, in principle, information can be retrieved about the revealed risk aversion and prudence of investors. An empirical section on a small sample of assets serves as an illustration.
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Bibliographic InfoPaper provided by IESEG School of Management in its series Working Papers with number 2005-ECO-05.
Length: 36 pages
Date of creation: Sep 2005
Date of revision:
Publication status: Published in Management Science, January 2007, 53(1), pp. 135-149
shortage function; efficient frontier; mean-variance-skewness; portfolios; risk aversion; prudence;
Other versions of this item:
- Walter Briec & Kristiaan Kerstens & Octave Jokung, 2007. "Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach," Management Science, INFORMS, vol. 53(1), pages 135-149, January.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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