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

  • Walter Briec

    (University of Perpignan)

  • Kristiaan Kerstens

    ()

    (CNRS-LEM and IESEG School of Management)

  • Octave Jokung

    (EDHEC Business School, Lille)

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, 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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File URL: http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=36985728_2005-ECO-5_Briec_Kerstens_Jokung.pdf
File Function: First version, 2005
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Paper provided by IESEG School of Management in its series Working Papers with number 2005-ECO-05.

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Length: 36 pages
Date of creation: Sep 2005
Date of revision:
Publication status: Published in Management Science, January 2007, 53(1), pp. 135-149
Handle: RePEc:ies:wpaper:e200505
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