Academic literature on the topic 'Preference for skewness'

Previous studies have shown that investor preference for positive skewness creates a potential premium on negatively skewed assets. In this paper, we attempt to explore the connection between investors’ skewness preferences and corresponding demand for a risk premium on asset returns. Using data from the Japanese stock market, we empirically study the significance of risk aversion with skewness preference that potentially delivers a premium. Compared to studies on other stock markets, our finding suggests that Japanese investors exhibit preference for positively skewed assets, but do not display dislike for ones that are negatively skewed. This implies that investors from different countries having dissimilar attitudes toward risk may possess different preferences toward positive skewness, which would result in a different magnitude of expected risk premium on negatively skewed assets.

Perspective on behavioral finance, we take a new look at the characteristics of investors’ risk preference, building the D-GARCH-M model, DR-GARCH-M model, and GARCHC-M model to investigate their changes with states of gain and loss and values of return together with other time-varying characteristics of investors’ risk preference. Based on a full description of risk preference characteristic, we develop a GARCHCS-M model to study its effect on the return skewness. The top ten market value stock composite indexes from Global Stock Exchange in 2012 are adopted to make the empirical analysis. The results show that investors are risk aversion when they gain and risk seeking when they lose, which effectively explains the inconsistent risk-return relationship. Moreover, the degree of risk aversion rises with the increasing gain and that of risk seeking improves with the increasing losses. Meanwhile, we find that investors’ inherent risk preference in most countries displays risk seeking, and their current risk preference is influenced by last period’s risk preference and disturbances. At last, investors’ risk preferences affect the conditional skewness; specifically, their risk aversion makes return skewness reduce, while risk seeking makes the skewness increase.

Rewards in the natural environment are rarely predicted with complete certainty. Uncertainty relating to future rewards has typically been defined as the variance of the potential outcomes. However, the asymmetry of predicted reward distributions, known as skewness, constitutes a distinct but neuroscientifically underexplored risk term that may also have an impact on preference. By changing only reward magnitudes, we study skewness processing in equiprobable ternary lotteries involving only gains and constant probabilities, thus excluding probability distortion or loss aversion as mechanisms for skewness preference formation. We show that individual preferences are sensitive to not only the mean and variance but also to the skewness of predicted reward distributions. Using neuroimaging, we show that the insula, a structure previously implicated in the processing of reward-related uncertainty, responds to the skewness of predicted reward distributions. Some insula responses increased in a monotonic fashion with skewness (irrespective of individual skewness preferences), whereas others were similarly elevated to both negative and positive as opposed to no reward skew. These data support the notion that the asymmetry of reward distributions is processed in the brain and, taken together with replicated findings of mean coding in the striatum and variance coding in the cingulate, suggest that the brain codes distinct aspects of reward distributions in a distributed fashion.

We find that the degree of expected idiosyncratic skewness in seasoned equity issuers’ stock returns is an important determinant of flotation costs and subsequent abnormal stock performance. High skewness issuers incur significantly greater offer price discounts, particularly when institutional share allocation is largest, pay higher gross underwriting spreads, and exhibit poorer stock performance in the three years after issuance, all compared to low skewness issuers. These results suggest that skewness-induced overpricing increases the flotation costs of seasoned equity offers and leads to poor subsequent stock performance. Received November 18, 2014; accepted December 17, 2015 by Editor Paolo Fulghieri.

Abstract Whether people seek or avoid risks on gambling, insurance, asset, or labor markets crucially depends on the skewness of the underlying probability distribution. In fact, people typically seek positively skewed risks and avoid negatively skewed risks. We show that salience theory of choice under risk can explain this preference for positive skewness, because unlikely, but outstanding payoffs attract attention. In contrast to alternative models, however, salience theory predicts that choices under risk not only depend on the absolute skewness of the available options, but also on how skewed these options appear to be relative to each other. We exploit this fact to derive novel, experimentally testable predictions that are unique to the salience model and that we find support for in two laboratory experiments. We thereby argue that skewness preferences—typically attributed to cumulative prospect theory—are more naturally accommodated by salience theory.

The diploma thesis is concerned with analysis of behavior of bettors on horse races. The aim is to test the hypothesis that bettors prefer skewness and they are risk averse. In the thesis is used the method of empirical data collection of horse racing in the Czech Republic and their subsequent testing using a regression model. The testing of the presented model did not confirm the hypothesis of skewness preference in the case of betting on horse races in the Czech Republic.

Cette thèse étudie le choix de portefeuille et l'évaluation d'actifs avec des préférences qui vont au-Delà des préférences d'espérance d'utilité et de moyenne-Variance standard. La première partie de cette thèse porte sur un modèle de décision dans lequel le décideur forme des croyances endogènes compte tenu de son utilité d'anticipation et de sa déception à posteriori. Les implications du modèle en termes de choix de portefeuille et d'évaluation d'actifs sont dérivées et comparées aux implications du modèle d'espérance d'utilité standard. La deuxième partie de cette thèse porte sur des investisseurs qui dérivent l'utilité des trois premiers moments du rendement de leur portefeuille. Nous dérivons et testons les conditions sous lesquelles des actifs supplémentaires peuvent améliorer l'univers d'investissement des investisseurs avec des préférences moyenne-variance-skewness. Les implications de ces préférences pour les rendements d'actifs à l'équilibre sont ensuite analysées et testées avec des rendements boursiers
This thesis studies portfolio choice and asset pricing with preferences which go beyond the standard expected utility and mean-Variance preferences. The first part of this thesis analyses a decision model in which the decision maker forms endogenous beliefs given his anticipation utility and his ex-Post disappointment. Portfolio choice and asset pricing implications of the model are derived and compared to the implications of the standard expected utility framework. The second part of this thesis analyses investors choice when preferences are derived from the first three moments of portfolio returns. We derive and test the conditions under which additional assets can improve the investment opportunity set of investors with mean-Variance-Skewness preferences. The implications of these preferences for the equilibrium cross-Section of asset returns are then analyzed and tested with stock returns

This dissertation attempts to explain the cross-section of expected returns based on the valuation equation of Miller and Modigliani (1961) and the cumulative prospect theory of Tversky and Kahneman (1992). It consists of three essays on empirical asset pricing. The first essay proposes an alternative metric for value investing: the dividend-to-market ratio (DM). The book-to-market ratio (BM) which is currently used in academia and industry, is a noisy measure for value investing, because book value is a weak indicator of intrinsic value. Motivated by the valuation equation of Miller and Modigliani (1961), this paper suggests that DM is much more efficient in identifying undervalued stocks than BM, due to the strong link between expected dividends and intrinsic value. DM also provides a better estimation of expected stock returns compared to the linear combination of BM, profitability and investment used in the five-factor model of Fama and French (2015a), because it allows for non-linearities between expected returns and these variables. Results of cross-sectional regressions at the firm level and time-series regressions at the portfolio level consistently show that DM has a far stronger link with expected returns than BM, and it also outperforms a linear combination of BM, profitability and investment. The second essay examines the prediction of cumulative prospect theory whereby investors prefer lottery-like (or positively skewed) payoffs, resulting in overpricing and low expected returns to such assets. Given that earnings surprises are associated with lottery-like payoffs, investors should be willing to pay more for stocks with a high probability of generating positive earnings surprises. Empirical tests in this study consistently suggest that there is a strong negative correlation between the predicted profitability shocks (PPS) and expected stock returns. This essay contributes to the literature in asset pricing by revealing the link between skewness preference and prominent anomalies such as BM, profitability and price momentum. The explanatory power of BM and operating profitability disappears after controlling for PPS, which indicates that both could be noisy proxies for PPS in predicting average returns. Further, the price momentum effect cannot be driven out by earnings momentum once PPS is taken into account, which demonstrates that price momentum has incremental explanatory power for stock returns over that provided by earnings momentum. The third essay (co-authored with Takeshi Yamada and Tariq Haque) examines if crash-risk is systematically priced in momentum portfolio returns. A recent paper by Daniel and Moskowitz (2016) documents that crashes occur in the momentum strategy, and investors may take many years to recover from the resulting losses. Thus, this essay asks, if crash risk exists in momentum portfolios, is such risk priced in the market? To this end, we develop a measure, tail coskewness, that focuses exclusively on how tail events (low-probability events leading to large gains or losses) contribute to the systematic skewness of momentum portfolios. The results show that tail coskewness not only subsumes the risk premium associated with coskewness which may be a determinant of cross-sectional returns as shown by Harvey and Siddique (2000), but also that associated with firm size. The paper uses US data from 1927 as well as international data, where robust results are found across different time-periods and markets.
Thesis (Ph.D.) -- University of Adelaide, Business School, 2017

碩士
銘傳大學
經濟學系碩士班
97
Higher-order preferences are introduced into international portfolio selection model toward resolving the home bias puzzle in this study. Under the mean-variance paradigm, investors engage in cross-border investments to diversify their risk globally. Yet higher-order preferences such as investors’ preference toward positively skewed portfolio return, their aversion to fat-tailed return distribution are all ignored in the model. As have been documented by Simkowitz and Reedles (1978) and Zilca (2004), diversification is not necessary desirable as it might also eliminate the skewness of their portfolio returns. This then shed light on the possibility that the ignorance over higher-order preferences might lead to a foreign portfolio weight that is overestimated. This possibility of resolving the home bias puzzle will be investigated with empirical studies of Taiwan.

Expected utility is introduced. Risk aversion and its equivalence with concavity of the utility function (Jensen’s inequality) are explained. The concepts of relative risk aversion, absolute risk aversion, and risk tolerance are introduced. Certainty equivalents are defined. Expected utility is shown to imply second‐order risk aversion. Linear risk tolerance (hyperbolic absolute risk aversion), cautiousness parameters, constant relative risk aversion, and constant absolute risk aversion are described. Decreasing absolute risk aversion is shown to imply a preference for positive skewness. Preferences for kurtosis are discussed. Conditional expectations are introduced, and the law of iterated expectations is explained. Risk averse investors are shown to dislike mean‐independent noise.