Skewness preference, mean-variance and the demand for put options
This paper compares the mean-variance and the mean-variance-skewness approaches to modelling expected utility. Attention is focused on a problem encountered in risk management: determining the optimal demand for a put option hedging the return on an asset with a negatively skewed return distribution. It is demonstrated theoretically that incorporating positive skewness preference into the decision-maker's objective function typically produces a reduction in the demand for put options when compared with the mean-variance solution. A state-dependent example is provided to illustrate how a mean-variance-skewness objective can result in a significant reduction in the optimal amount of crop insurance demanded when compared with the mean-variance solution. Copyright © 1999 John Wiley & Sons, Ltd.
Year of publication: |
1999
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Authors: | Poitras, Geoffrey ; Heaney, John |
Published in: |
Managerial and Decision Economics. - John Wiley & Sons, Ltd., ISSN 0143-6570. - Vol. 20.1999, 6, p. 327-342
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Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
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