The impact of skew on performance and bias

Zachary Dugan and Alexander Greyserman

Journal of Behavioral and Experimental Finance, 2019, vol. 22, issue C, 232-238

Abstract: In this paper, we explore the relationship between the statistic skew and known behavioral biases. We investigate the impact that skew has on the perception of performance as a function of time, and we show that negative skew artificially improves performance over the short term, while positive skew has the opposite effect. We quantify the relationship between skew and drawdown depth and length, and we show that negative skew increases drawdown depth and length, and that again positive skew does the opposite. Finally, we explore the relationship between skew, volatility, and drawdown, and we show that negative skew amplifies the increase that volatility causes in drawdown depth and length, while positive skew has a corresponding dampening effect.

Keywords: Skew; Volatility; Drawdown; Behavioral biases; Loss aversion; Recency bias (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:22:y:2019:i:c:p:232-238

DOI: 10.1016/j.jbef.2019.03.008

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