Asset pricing and portfolio selection based on the multivariate extended skew-Student-t distribution

The returns on most financial assets exhibit kurtosis and many also have probability distributions that possess skewness as well. In this paper a general multivariate model for the probability distribution of assets returns, which incorporates both kurtosis and skewness, is described. It is based on the multivariate extended skew-Student-t distribution. Salient features of the distribution are described and these are applied to the task of asset pricing. The paper shows that the market model is non-linear in general and that the sensitivity of asset returns to return on the market portfolio is not the same as the conventional beta, although this measure does arise in special cases. It is shown that the variance of asset returns is time varying and depends on the squared deviation of market portfolio return from its location parameter. The first order conditions for portfolio selection are described. Expected utility maximisers will select portfolios from an efficient surface, which is an analogue of the familiar mean-variance frontier, and which may be implemented using quadratic programming

Econometric analysis of volatile art markets

A new heteroskedastic hedonic regression model is suggested which takes into account time-varying volatility and is applied to a blue chips art market. A nonparametric local likelihood estimator is proposed, and this is more precise than the often used dummy variables method. The empirical analysis reveals that errors are considerably non-Gaussian, and that a student distribution with time-varying scale and degrees of freedom does well in explaining deviations of prices from their expectation. The art price index is a smooth function of time and has a variability that is comparable to the volatility of stock indices.Volatility, art markets, hedonic regression, semiparametric estimation

Regression models under competing covariance matrices: A Bayesian perspective

Economics

Poland in the Period of Economic Transition and Germany After Reunification an Attempt at Assessing Σ-Convergence

In 2009 and 2010 Poland and Germany are celebrating some important anniversaries - 20 years of the first free elections and the fall of the Berlin Wall. These jubilees inspire research aiming at taking stock of developments having unfolded over this time. Since the economic cohesion is high on the EU agenda, examining international and interregional differences seems an important research task. This article aims at evaluating and comparing σ-convergence (diminishing discrepancies of GDP p.c.) in Poland (1995-2005) and Germany (1992-2006) on three NUTS levels. Preliminary results point to inequalities regularly diminishing in Germany, however, growing in Poland. A tentative reasoning suggests that increasing values of regional differences observed in Poland might be a temporary phenomenon

Model Comparison of Coordinate-Free Multivariate Skewed Distributions with an Application to Stochastic Frontiers

We consider classes of multivariate distributions which can model skewness and are closed under orthogonal transformations. We review two classes of such distributions proposed in the literature and focus our attention on a particular, yet quite flexible, subclass of one of these classes. Members of this subclass are defined by affine transformations of univariate (skewed) distributions that ensure the existence of a set of coordinate axes along which there is independence and the marginals are known analytically. The choice of an appropriate m-dimensional skewed distribution is then restricted to the simpler problem of choosing m univariate skewed distributions. We introduce a Bayesian model comparison setup for selection of these univariate skewed distributions. The analysis does not rely on the existence of moments (allowing for any tail behaviour) and uses equivalent priors on the common characteristics of the different models. Finally, we apply this framework to multi-output stochastic frontiers using data from Dutch dairy farms.Coordinate-free distributions, dairy farm, multivariate skewness, orthogonal transformation, stochastic frontier.