Considering Skewness Of Returns Equally A Opportunity Metric

Another tool inward the toolbox.
From The Capital Spectator 

Intech Investment Management of late published a primer on monitoring marketplace stress past times way of several opportunity metrics, including skewness of returns (SoR). In the grand system of quantifying risk, SoR is relatively obscure, simply Intech makes a practiced instance for paying to a greater extent than attending to this data.

Applied to fiscal markets, skewness measures the grade of provide asymmetry inward damage of the probability distribution to a greater extent than or less the mean. In English, skewness tells us if returns convey been extreme or not. H5N1 relatively high positive skewness reading indicates returns deep inward the correct tail of the distribution. H5N1 negative issue equates amongst a loss inward the left tail. In short, skewness offers a straightforward tool for quantifying in addition to monitoring tail risk.

Intech advises that “when investors piece of job out irrationally exuberant, marketplace returns tend to piece of job out less negatively skewed or, fifty-fifty briefly, positively skewed (e.g., initiative of all of 1987 in addition to mid-1990s), which supports the potential for an increased likelihood of a pregnant marketplace dislocation. Conversely, rattling depression levels of skewness oft coincide amongst the marketplace daze itself, in addition to eventually manifest themselves every bit increased marketplace dislocation amongst positive outcomes (e.g., early on 2004 in addition to next the Global Financial Crisis inward 2009).”

Measuring provide skewness for, say, the the US stock marketplace offers a useful lens for quantifying the grade of exuberance, or the lack thereof. H5N1 nautical chart inward the Intech enquiry authorities notation shows the ebb in addition to current of marketplace stance through time.

Another way to purpose skewness is past times comparing markets. Consider, for instance, how the the US stock marketplace stacks upwardly against the the US bond marketplace inward recent history. Let’s purpose 2 ETFs every bit proxies to mash the numbers: SPDR S&P 500 (SPY) for equities in addition to iShares Core the US Aggregate Bond (AGG) for fixed-income securities. For easier comparison, the information inward the nautical chart below is shown every bit Z-scores, which reverberate how the skewness values compass inward damage of criterion deviations inward a higher house or below their means. For this example, the results are based on a rolling 30-day window of daily returns.

Note the negative human relationship betwixt stock in addition to bond skewness values. The correlation for the 2 information sets inward the fourth dimension menses shown inward the nautical chart inward a higher house is -0.46. That’s a primal clue for expecting that when the crowd is relatively bullish inward i market, the contrary volition live on truthful inward the other. No i should live on surprised past times that relationship, simply it’s valuable to convey difficult information for tracking the stock/bond connection inward existent time, perchance amongst an oculus on a tactical property allotment application....MORE