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In search of positive skewness: the case of individual investors

  • Patrick Roger


    (LaRGE Research Center, Université de Strasbourg)

  • Marie-Hélène Broihanne

    (LaRGE Research Center, Université de Strasbourg)

  • Maxime Merli

    (LaRGE Research Center, Université de Strasbourg)

In this paper, we first prove analytically that the skewness of returns of portfolios built with Arrow-Debreu securities decreases with diversification. Through simulations, we also show that this result remains true in a financial market with a finite number of states of nature. We then analyze the behavior of over 85,000 individual investors at a large brokerage house. Though the main determinant of underdiversification is the portfolio value we find that the skewness of returns remains significant in explaining diversification after controlling for this value. Moreover, we show that the decrease in skewness induced by diversification is essentially driven by the share of total variance of stock returns due to common factors. These findings extend those of Mitton and Vorkink (2007) and explain the variability over time of the relationship between skewness and diversification.

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Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2012-04.

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Date of creation: 2012
Date of revision:
Handle: RePEc:lar:wpaper:2012-04
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