Sunday, June 23, 2013

A Premium for Negative Skew?

Xiong, Idzorek, and Ibbotson have a new paper coming out in the JPM showing that mutual funds with the highest tail risk (ie, highest probability of extreme downside returns) have higher returns. That is, there's a positive risk premium to negative skew. This is rather curious.

The only thing I saw in this field related to this found the opposite. That is, in a 2006 JoF paper, Kosowski, Timmermann, and Wermers, and White bootstrapped the alphas of the entire universe of U.S. domestic equity mutual funds, and found that the top decile had much more positive skewness than the median. The bottom decile had more negative skewness.

 I don't have the data, but it can't be consistent with both findings.


Fish Goldstein said...

This is not surprising.

First, because people's utility functions are averse to losses.

Second, the yield curve implies that people care about higher moments than 2. I can explain this if you're curious.

Eric Falkenstein said...

If you are alluding to aversion to negative skew, I understand that, if not, I'd like to know what you mean. I'm just confused because another team looking at the same universe (mutual funds) found opposite results. Further, that 'risk premium' isn't there in stock portfolios, or bonds.

Anonymous said...

The answer is obvious to anyone who trades. An effort to reduce left tail risk by applying filters reduces also the winners. Let the left tail alone and you get more winners. Simple.

cheap runescape gold said...

If you are alluding to aversion to damaging alter, I realize that, or even, I would like to know what a person mean. I am just simply baffled due to the fact one more team going through the identical universe (shared funds) located reverse final results. Additional, that 'risk premium' isn't generally there on hand portfolios, or perhaps securities.

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tom coleman said...

Is the older study (2006) based on an ex-post measure of skewness whereas the newer study is based on ex-ante measure of skewness?

Fish Goldstein said...

Yes, I meant aversion to negative skew.