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Title:Implications of asymmetry risk for portfolio analysis and asset pricing PDF Logo
Authors:Chabi-Yo, Fousseni
Leisen, Dietmar
Renault, Eric
Issue Date:2007
Series/Report no.:Bank of Canada Working Paper 2007,47
Abstract:Asymmetric shocks are common in markets; securities'; payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique's (2000) conditional mean-variance-skewness asset pricing model to non-vanishing riskneutral market variance. The empirical relevance of this extension is documented in the context of the asymmetric GARCH-in-mean model of Bekaert and Liu (2004).
Subjects:Financial markets
Market structure and pricing
JEL:C52
D58
G11
G12
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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