Unequal Returns: Using the Atkinson Index to Measure Financial Risk

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Unequal Returns: Using the Atkinson Index to Measure Financial Risk. / Fischer, Thomas; Lundtofte, Frederik.

2018. (Working Papers; Nr. 2018:25).

Forskningsoutput: Working paper

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TY - UNPB

T1 - Unequal Returns: Using the Atkinson Index to Measure Financial Risk

AU - Fischer, Thomas

AU - Lundtofte, Frederik

PY - 2018

Y1 - 2018

N2 - 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.

AB - 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.

KW - risk

KW - performance

KW - non-Gaussian distributions

KW - cumulants

KW - hedge funds

KW - G11

M3 - Working paper

T3 - Working Papers

BT - Unequal Returns: Using the Atkinson Index to Measure Financial Risk

ER -