Title

Generalized Deviation Portfolio Allocation: Relation to Utility Theory and Empirical Evidence

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Abstract

This paper presents a new measure of skewness, skewness-aware deviation, which can be linked to tail risk measure such as Value-at-Risk. We show that this measure of skewness arises naturally also when one thinks of maximizing the certainty equivalent for an investor with a negative exponential utility function, thus bringing together the mean-risk and the expected utility framework for an important class of investor preferences. We present a skewness-aware asset pricing and allocation framework, and show via computational experiments that the proposed approach results in improved and intuitively appealing asset allocation when returns follow real-world or simulated skewed distributions.

Disciplines

Applied Mathematics | Mathematics | Statistics and Probability

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