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Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation

  • Javier Mencía

    ()

    (Banco de España)

  • Enrique Sentana

    ()

    (Centro de Estudios Monetarios y Financieros)

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-variance-skewness 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 mean-variance-skewness frontier generated by the ten Datastream US sectoral indices, and conduct spanning tests.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0909e.pdf
File Function: First version, June 2009
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0909.

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Length: 50 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:bde:wpaper:0909
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