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From Normal vs Skew-Normal Portfolios: FSD and SSD Rules

Author(s): Sergio Scarlatti | Francesco Blasi

Journal: Advances in Molecular Imaging
ISSN 2161-6728

Volume: 02;
Issue: 01;
Start page: 90;
Date: 2012;
Original page

Keywords: Normal Distribution | Skew-Normal Distribution | Mixture Distributions | Stochastic Ordering | Stochastic Dominance | Portfolio Selection | Derivatives | Straddles

In this paper we study stochastic dominance rules of first and second order for univariate skew-normal random variables, the analysis being relevant in connection with the problem of portfolio choice in stock markets showing departure from the classical assumption of normality on returns. Besides that, our analysis is also relevant for markets where stocks returns are normally distributed: if standard derivatives are tradable and straddles, characterized by V-shaped pay-outs, are implementable at specific strike prices, then, portfolios including them, can exhibit exact skew-normality in their returns. We provide a set of simple conditions on the statistical parameters of the distributions which imply FSD and SSD and discuss some application of our criteria.
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