The Impact Of Investors’ Risk Attitudes On Skewness Of Return Distribution

Skewness of return distribution is a significant characteristic that reflects the price of financial asset. Many a research has found that the distribution of financial asset always shows deviation from normal distribution with negative or positive. The probability of loss increases with negative skewness, and that of gain increases with positive skewness. As it is unclear with the reasons for the skewness of the return distribution, there is no agreement on about the formulation of constraints on portfolio optimization and the pricing kernel process.The original explanation of skew distribution of the return is based on asymmetry of fluctuation, which is mainly leverage effect and feedback effect of fluctuation, but the explanations had not been widely supported by empirical study. These theories mainly studied the distribution of return skewness from macroscopic perspectives, but with the development of behavioral financial theory, more scholars came to consider the impact of investors’risk attitudes and behavioral biases on the skewness of return distribution from microscopic perspectives.Risk preference presents people’s attitude towards risk, reflecting the compensation required for risky assets, the standard financial theory based on "rational" assumptions claim that people make decisions based on the maximization principle in expected utility, having consistently shown a constant risk preference. According to prospect theory that was proposed by Kahneman and Tversky in 1979, people are not entirely rational when making real investment decisions, certain irrational factors will affect the decision-making behavior through individual psychological, and individuals tend to be risk-seeking with respect to losses and risk averse in the face of gains. Moreover,the study of investors’ risk preference mostly based on experimental psychology or personal trading account data, and there is a lot of limitation. Therefore, in this paper, we study the impact of Investors’Risk Attitudes on Skewness of return Distribution from the angle of behavior finance theory,taking the the overall behavior of investors in the market as the research object.However, investors’risk attitudes also change with some factors. At first, the paper develops the GARCHC-M model to further explore the effect of current gain or loss on investors’ risk attitudes on the basis of previous study of time-varying risk compensate. The essay makes a full depiction on the characteristics of investors’risk attitudes, and then we introduce the risk attitude in GARCHS model’s skewness equation and develop a GARCHCS-M model to study its effect on the return skewness. The data of composite indexes of stocks whose market values rank the top ten among the global stock exchanges in 2011 are used to make an empirical study. Results show that investors’risk attitudes are affected by current gains or losses and investors risk aversion improves with increasing gains and decreases with increasing losses. At the same time, investors’ risk attitudes affect skewness of return distribution; their risk aversion decrease the return skewness while risk seeking increase the return skewness.