Staff Working Papers
The early work of Tobin (1958) showed that portfolio allocation decisions can be reduced to a two stage process: first decide the relative allocation of assets across the risky assets, and second decide how to divide total wealth between the risky assets and the safe asset. This so called twofund separation relies on special assumptions on either returns or preferences.
Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices.
The authors examine the ability of economic models with regime shifts to rationalize and explain the risk-aversion and pricing-kernel puzzles put forward in Jackwerth (2000).