Journal of Applied Econometrics

Modeling the conditional distribution of financial returns with asymmetric tails

Early View

Summary This paper proposes a conditional density model that allows for differing left/right tail indices and time‐varying volatility based on the dynamic conditional score (DCS) approach. The asymptotic properties of the maximum likelihood estimates are presented under verifiable conditions together with simulations showing effective estimation with practical sample sizes. It is shown that tail asymmetry is prevalent in global equity index returns and can be mistaken for skewness through the center of the distribution. The importance of tail asymmetry for asset allocation and risk premia is demonstrated in‐sample. Application to portfolio construction out‐of‐sample is then considered, with a representative investor willing to pay economically and statistically significant management fees to use the new model instead of traditional skewed models to determine their asset allocation.

Related Topics

Related Publications

Related Content

Site Footer


This website is provided by John Wiley & Sons Limited, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ (Company No: 00641132, VAT No: 376766987)

Published features on are checked for statistical accuracy by a panel from the European Network for Business and Industrial Statistics (ENBIS)   to whom Wiley and express their gratitude. This panel are: Ron Kenett, David Steinberg, Shirley Coleman, Irena Ograjenšek, Fabrizio Ruggeri, Rainer Göb, Philippe Castagliola, Xavier Tort-Martorell, Bart De Ketelaere, Antonio Pievatolo, Martina Vandebroek, Lance Mitchell, Gilbert Saporta, Helmut Waldl and Stelios Psarakis.