On Diversification Given Asymmetry in Returns

Conine, Thomas E.; Tamarkin, Maurry

doi:10.2307/2327305

Cited by 39 publications

(22 citation statements)

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“…Kraus and Litzenberger (1976), Conine and Tamarkin (1981), Kane (1982), and Sears and Trennepohl (1983) have used third-order Taylor's series approximations of HARA utility functions to show the impact of skewness in asset pricing as well as the antidiversification incentive that positive skewness imparts on portfolio decisions.…”

Section: Related Literaturementioning

confidence: 99%

The impact of skewness in the hedging decision

2006

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The impact of skewness in the hedger's objective function is tested using a model of hedging derived from a third-order Taylor Series approximation of expected utility. To determine the effect of price skewness upon hedging and speculation, analytical results are derived using an example of cotton storage. Findings suggest that when forward risk premiums and price skewness in the spot asset have opposite signs, speculation increases relative to the mean-variance model. When the signs are identical, speculation will decrease, contradicting findings of mean-variance models.

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Section: Related Literaturementioning

confidence: 99%

The impact of skewness in the hedging decision

2006

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“…The assumption of an equal weighting scheme is consistent with the diversification literature (for example, see Beedles (1979), Conine and Tamarkin (1981), Elton and Gruber (1977), Evans and Archer (1968), Trennepohl (1982, 1983) and Simkowitz and Beedles (1978). While it is a reasonable approximation of sampling risk at large portfolio sizes, it is inadequate at small n, because of the asymmetry in the distribution.…”

Section: Footnotesmentioning

confidence: 54%

Skewness, sampling risk, and the importance of diversification

Sears

Trennepohl

1986

Journal of Economics and Business

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“…An extension of the Capital Asset Pricing Model of asset selection incorporating three moments is developed and tested in common stocks by Arditti and Levy (1975); Conine and Tamarkin (1981); Jean (1971Jean ( , 1973; and Kraus and Litzenberger (1976). In these models, the investor has a positive preference for skewness of return.…”

Section: Literature Reviewmentioning

confidence: 99%

Systematic skewness in futures contracts

Junkus

1991

Journal of Futures Markets

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nder the Capital Asset Pricing Model (CAPM), the excess rate of return on a U risky asset depends on its contribution to the variance of the market portfolio, that is, its systematic risk. The CAPM has been applied to futures contracts in an effort to discover, and measure the size of, a risk premium for these assets. However, the existence of a risk premium in futures contracts and its size remains a subject of controversy.The mean-variance asset pricing model has been extended to three moments in common stocks to include a positive investor preference for systematic skewness of asset return. This article tests a three-moment version of the CAPM for futures contracts.Several issues relating to a risk premia in futures are addressed. First, applying a three-moment pricing model to futures contracts can shed light on the nature of the risk premium in futures. Since commodity futures appear to have little systematic risk, it may be that the risk of these contracts takes a form other than the usual covariance with the market. A three-moment asset pricing model that incorporates more information on futures returns distributions may be more appropriate for futures contracts than the traditional CAPM.Second, systematic co-skewness is consistent with a two-factor Arbitrage Pricing Model of asset returns: if investors exhibit a positive preference for skewness, a second, quadratic market factor may have significance in explaining returns on futures contracts. Therefore, this article also tests a two-factor, quadratic asset pricing model for futures contracts.Third, the significance of co-skewness is tested using three different proxies for the market portfolio: the S&P500, the traditional measure of the market portfolio; a combined commodity cash price/S&PSOO portfolio, reflecting the relative weighting of commodities in the U.S. wealth portfolio; and a 100% commodity portfolio representing a well-diversified portfolio of agricultural wealth. It may be that coskewness, like systematic risk in futures, depends on the composition of the market portfolio used to test for its significance. Use of an agricultural portfolio makes the strongest possible case for the explanatory power of systematic risk or systematic co-skewness in futures returns because the correlation between futures returns and an agricultural wealth portfolio (thereby the measure of risk for the futures) should be high. Finally, the tests for risk premia in futures are conducted here on a much larger number of contracts than have been used in previous studies.The results of this article show that futures are not risky assets, despite their apparent volatility, within either a 2-or 3-moment asset pricing model. Further, fuJoan C. Junkus is an Associate Professor of Finance at DePaul University.

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On Diversification Given Asymmetry in Returns

Cited by 39 publications

References 0 publications

The impact of skewness in the hedging decision

The impact of skewness in the hedging decision

Skewness, sampling risk, and the importance of diversification

Systematic skewness in futures contracts

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