SKEWNESS PREFERENCE AND THE VALUATION OF RISK ASSETS

THIS PAPER EXTENDS THE SHARPE LINTNER CAPITAL ASSET PRICING MODEL TO INCORPORATE THE EFFECT OF SKEWNESS OF VALUATION. EMPIRICAL EVIDENCE IS PRESENTED THAT IS CONSISTENT WITH A THREE MOMENT VALUATION MODEL. INVESTORS ARE FOUND TO HAVE AN AVERSION TO VARIANCE AND A PREFERENCE FOR POSITIVE SKEWNESS. THESE FINDINGS TEND TO REFUTE THE USEFULNESS OF QUADRATIC UTILITY AS A BASIS FOR POSITIVE VALUATION THEORY AND ARE IN ACCORD WITH THE RECENT EXPERIMENTAL EVIDENCE OF GORDON, PARADIS, AND ROCHE THAT MOST INDIVIDUALS HAVE CONCAVE UTILITY FUNCTIONS DISPLAYING DECREASING ABSOLUTE RISK AVERSION. PRIOR NEGATIVE EMPIRICAL FINDINGS THAT WERE ATTRIBUTED TO RESTRICTIONS ON RISKLESS BORROWING AND LENDING RATES MAY HAVE RESULTED INSTEAD FROM MISSPECIFICATIONS OF THE CAPITAL ASSET PRICING MODEL BY THE OMISSION OF SYSTEMATIC SKEWNESS. TABLES. REFERENCES.