Modeling skewness in portfolio choice

We seek the best skewness models for portfolio choice decisions. To this end, we compare the predictive ability and portfolio performance of several prominent skewness models in a sample of 10 international equity market indices. Overall, models that employ information from the option markets outperform models that only rely on stock returns. We propose an option-based skewness estimator that accounts for the skewness risk premium. This estimator offers the most informative forecasts of future skewness, the lowest prediction errors, and the best portfolio performance in most of our tests.