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Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach

  • Walter Briec

    ()

    (University of Perpignan, 52 Avenue Villeneuve, F-66000 Perpignan, France)

  • Kristiaan Kerstens

    ()

    (CNRS-LEM (UMR 8179), IESEG School of Management, 3 Rue de la Digue, F-59000 Lille, France)

  • Octave Jokung

    ()

    (EDHEC Business School, 58 Rue du Port, F-59046 Lille, France)

This 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, nonconvex 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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File URL: http://dx.doi.org/10.1287/mnsc.1060.0596
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 53 (2007)
Issue (Month): 1 (January)
Pages: 135-149

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Handle: RePEc:inm:ormnsc:v:53:y:2007:i:1:p:135-149
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