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Unequal returns : Using the Atkinson index to measure financial risk

Fischer, Thomas LU and Lundtofte, Frederik LU (2020) In Journal of Banking and Finance 116.
Abstract

We apply the Atkinson (1970) inequality index to time series of asset returns to offer a novel measure of financial risk consistent with expected-utility theory. This measure is converted to a certainty-equivalent return serving as a performance measure. We extend the Atkinson index to HARA utility and derive closed-form solutions to our measures for a number of preference-return combinations. Further, we establish relationships between risk aversion and the weights assigned to the cumulants of the return distribution for our performance measure. Using data from hedge funds and asset-pricing anomalies, we find that our performance measure contains additional, economically meaningful information.

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author
and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Cumulants, Hedge funds, Non-Gaussian distributions, Performance, Risk
in
Journal of Banking and Finance
volume
116
article number
105819
publisher
Elsevier
external identifiers
  • scopus:85084051846
ISSN
0378-4266
DOI
10.1016/j.jbankfin.2020.105819
language
English
LU publication?
yes
id
e14cc6a7-a06d-4b61-a5be-5bcba8763237
date added to LUP
2020-05-08 13:58:05
date last changed
2020-05-20 05:02:42
@article{e14cc6a7-a06d-4b61-a5be-5bcba8763237,
  abstract     = {<p>We apply the Atkinson (1970) inequality index to time series of asset returns to offer a novel measure of financial risk consistent with expected-utility theory. This measure is converted to a certainty-equivalent return serving as a performance measure. We extend the Atkinson index to HARA utility and derive closed-form solutions to our measures for a number of preference-return combinations. Further, we establish relationships between risk aversion and the weights assigned to the cumulants of the return distribution for our performance measure. Using data from hedge funds and asset-pricing anomalies, we find that our performance measure contains additional, economically meaningful information.</p>},
  author       = {Fischer, Thomas and Lundtofte, Frederik},
  issn         = {0378-4266},
  language     = {eng},
  publisher    = {Elsevier},
  series       = {Journal of Banking and Finance},
  title        = {Unequal returns : Using the Atkinson index to measure financial risk},
  url          = {http://dx.doi.org/10.1016/j.jbankfin.2020.105819},
  doi          = {10.1016/j.jbankfin.2020.105819},
  volume       = {116},
  year         = {2020},
}