Asset pricing and portfolio selection based on the multivariate extended skew-Student-<Emphasis Type="Italic">t</Emphasis> distribution |
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Authors: | C J Adcock |
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Institution: | (1) School of Undergraduate Studies, Europe, UMUC, University of Maryland, 3501 University Boulevard East, Adelphi, MD 20783, USA;(2) CCFEA, University of Essex, Wivenhoe Park, Colchester, Essex, CO4 3SQ, UK |
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Abstract: | The returns on most financial assets exhibit kurtosis and many also have probability distributions that possess skewness as
well. In this paper a general multivariate model for the probability distribution of assets returns, which incorporates both
kurtosis and skewness, is described. It is based on the multivariate extended skew-Student-t distribution. Salient features of the distribution are described and these are applied to the task of asset pricing. The
paper shows that the market model is non-linear in general and that the sensitivity of asset returns to return on the market
portfolio is not the same as the conventional beta, although this measure does arise in special cases. It is shown that the
variance of asset returns is time varying and depends on the squared deviation of market portfolio return from its location
parameter. The first order conditions for portfolio selection are described. Expected utility maximisers will select portfolios
from an efficient surface, which is an analogue of the familiar mean-variance frontier, and which may be implemented using
quadratic programming. |
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Keywords: | |
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