Skewed Distributions in Finance and Actuarial Science: A Review
Journal
European Journal of Finance
ISSN
1351-847X
ISSN-Digital
1466-4364
Type
journal article
Date Issued
2015
Author(s)
Abstract
That the returns on financial assets and insurance claims are not well described by the multivariate normal distribution is generally acknowledged in the literature. This paper presents a review of the use of the skew-normal distribution and its extensions in finance and actuarial science, highlighting known results as well as potential directions for future research. When skewness and kurtosis are present in asset returns, the skew-normal and skew-Student distributions are natural candidates in both theoretical and empirical work. Their parameterization is parsimonious and they are mathematically tractable. In finance, the distributions are interpretable in terms of the efficient markets hypothesis. Furthermore, they lead to theoretical results that are useful for portfolio selection and asset pricing. In actuarial science, the presence of skewness and kurtosis in insurance claims data is the main motivation for using the skew-normal distribution and its extensions. The skew-normal has been used in studies on risk measurement and capital allocation, which are two important research fields in actuarial science. Empirical studies consider the skew-normal distribution because of its flexibility, interpretability, and tractability. This paper comprises four main sections: an overview of skew-normal distributions; a review of skewness in finance, including asset pricing, portfolio selection, time series modeling, and a review of its applications in insurance, in which the use of alternative distribution functions is widespread. The final section summarizes some of the challenges associated with the use of skew-elliptical distributions and points out some directions for future research.
Language
English
Keywords
skew-normal distribution
asset pricing
portfolio selection
risk measurement
capital allocation
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Routledge
Publisher place
London
Volume
21
Number
13-14
Start page
1253
End page
1281
Pages
42
Subject(s)
Division(s)
Eprints ID
215380