Unequal returns: Using the Atkinson index to measure financial risk

Research output: Contribution to journalArticle

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.

Details

Authors
Organisations
External organisations
  • Aalborg University
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • Cumulants, Hedge funds, Non-Gaussian distributions, Performance, Risk
Original languageEnglish
Article number105819
JournalJournal of Banking and Finance
Volume116
Publication statusPublished - 2020
Publication categoryResearch
Peer-reviewedYes

Related research output

Thomas Fischer & Frederik Lundtofte, 2018, (Working Papers; no. 2018:25).

Research output: Working paper

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