A Coskewness Shrinkage Approach for Estimating the Skewness of Linear Combinations of Random Variables
Journal of Financial Econometrics, Forthcoming
32 Pages Posted: 20 Sep 2016 Last revised: 15 Aug 2018
Date Written: September 16, 2016
Supplementary Appendix is available at: https://ssrn.com/abstract=2970015. Decision making in finance often requires an accurate estimate of the coskewness matrix to optimize the allocation to random variables with asymmetric distributions. The classical sample estimator of the coskewness matrix performs poorly for small sample sizes. A solution is to use shrinkage estimators, defined as the convex com- bination between the sample coskewness matrix and a target matrix. We propose unbiased consistent estimators for the MSE loss function and include the possibility of having multiple target matrices. In a portfolio application, we find that the pro- posed shrinkage coskewness estimators are useful in mean-variance-skewness efficient portfolio allocation of funds of hedge funds.
Keywords: Coskewness, MSE, multiple targets, portfolio optimisation, shrinkage
JEL Classification: C100, C130, G110
Suggested Citation: Suggested Citation