Unequal returns: Using the Atkinson index to measure financial risk

Thomas Fischer, Frederik Lundtofte*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Article number105819
JournalJournal of Banking & Finance
Volume116
ISSN0378-4266
DOIs
Publication statusPublished - Jul 2020

Keywords

  • Cumulants
  • Hedge funds
  • Non-Gaussian distributions
  • Performance
  • Risk

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