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Measuring Skewness
Measuring Skewness
and Kurtosis
Capital Market Risk Advisors
CMRA
Why are Returns Skewed?
CMRA 2
Defining Skewness
Skewness is the standardized 3rd central
moment of a distribution
E ( X − µ )3
s =
σ 3
CMRA 3
Calculating Skewness
Given a set of returns rt, t = 1,2,…T
1 T rt − r 3
sˆ = ∑ ( )
T t =1 σˆ
1 T 1 T
r = ∑ rt σˆ = ∑ ( r − r ) 2
T − 1 t =1
t
T t =1
CMRA 4
Skewness Adjustment
♦ A gamma distribution is a better proxy for skewed
portfolios
# of σ’s necessary
Skewness to achieve 99%
-2.83 3.99
CMRA 5
Why are Returns Kurtotic?
CMRA 6
Defining Kurtosis
Kurtosis is the standardized 4th central moment of a
distribution
E ( X − µ )4
κ =
σ 42
excess_κ = κ − 3
CMRA 7
Calculating Kurtosis
Observatio n of a set of returns : rt , t = 1, 2 , T .
1 T rt − r 4
κˆ = ∑( )
T t =1 σˆ
CMRA 8