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Title: Negative skewness of asset returns with positive time-varying risk premia Authors:  Christian Hafner - UCL/CORE (Belgium)
Dimitra Kyriakopoulou - Universite Catholique de Louvain (Belgium) [presenting]
Abstract: Portfolio selection and risk management are important problems that investors and portfolio managers face. The distributional characteristics of returns, for example the unconditional skewness, are able to create new challenges in the classical portfolio theory of Markowitz. Apart from the mean and variance predictability, portfolio choice can be also made with skewness information. Such a perspective can create for investors the notion of skewness corrected risk estimate, as their financial decisions can be affected by properties of the return distribution. It is well known that the marginal distribution of financial time series such as returns is often negatively skewed. We investigate the relation between positive time-varying risk premia and the unconditional skewness of returns. We show that if the error distribution is symmetric, the negative unconditional asymmetry of returns should be the outcome of a negative correlation between their first two conditional moments. Following one of the implications of the intertemporal capital asset pricing model (ICAPM), there is a positive and linear relationship between risk and expected returns. Under a fully parametric EGARCH-in-Mean specification, we propose to use an asymmetric error distribution in order to match the unconditional asymmetry of asset returns. Value-at-Risk prediction of the largest stock market indices is performed as an application.