Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311875 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Asset Management [ISSN:] 1479-179X [Volume:] 23 [Issue:] 6 [Publisher:] Palgrave Macmillan [Place:] London [Year:] 2022 [Pages:] 534-546
Publisher: 
Palgrave Macmillan, London
Abstract: 
In this paper, we analyze how tail risk impacts both asset prices and the optimal asset allocation. For this purpose, we consider an equilibrium model with investors exhibiting an empirically well-justifiable decreasing relative risk aversion (DRRA) and different investment horizons. In contrast to the seminal CAPM, two fund separation does no longer hold, and investors not only regard one risk measure such as the standard deviation but additionally care for the size of tail risk. The shorter the investment period, the more prone they are to negatively skewed returns. In particular, short-term investors not only hold a lower equity ratio than (else equal) long-term investors do, but they also reduce the fraction of assets with negative tail risk. Consistently, the more short-term investors are in a market, the higher the tail risk premium is, i.e., the additional expected return due to skewness beyond a given standard deviation. Consequently, these theoretical findings allow us to draw empirical predictions about (i) the drivers of the skewness premium, (ii) characteristics for markets in which the premium is especially severe, and (iii) the optimal investors' asset allocation.
Subjects: 
Asset allocation
Jump diffusion process
DRRA
Skewness premium
CAPM
Investment horizons
JEL: 
G11
G12
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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