A Moment Expansion of Downside Risk Measures

A decomposition of a sub-class of spectral risk measures is introduced in terms of L-moments accounting for geometric characteristics of the return distribution similar to the ones described by the ordinary moments.

Author(s):

Stoyan V. Stoyanov

Professor of Finance, EDHEC Business School

The decomposition completely characterises the spectral risk measures with square-integrable risk aversion functions and can be regarded as a link between higherorder moment risk and downside risk measures. Coherent approximations based on only a few L-moments can be successfully constructed for continuous risk aversion functions and can be applied to problems in portfolio theory to analyse the incremental impact of higher order moments on optimal allocations.

Type: Working paper
Date: le 06/12/2010
Research Cluster : Finance

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