ON THE ROLE OF SKEWNESS, KURTOSIS, AND THE LOCATION AND SCALE CONDITION IN A SHARPE RATIO PERFORMANCE EVALUATION SETTING
Abstract
In recent years, researchers and practitioners have invested considerable effort in the development of new investment fund performance measures that account for mean, variance and the higher moments of the return distribution. To justify the application and necessity of the new performance measures in decision-making, some authors argue that the theoretical conditions required to use the Sharpe ratio are violated by high skewness and kurtosis in empirical asset return data. In this note, we highlight that high levels of skewness and kurtosis and even cross-sectional variations in skewness and kurtosis do not allow a decision-theoretic rejection of the Sharpe ratio. However, we also point out that while it is hard to discard the measure on decision-theoretic grounds, it can be challenged on technical grounds because it has several undesirable properties.
References
- Financial Markets and Portfolio Management 27 , 299 ( 2013 ) . Crossref, Google Scholar
- Quantitative Finance 13 , 561 ( 2013 ) . Crossref, Web of Science, Google Scholar
- Scandinavian Journal of Statistics 24 , 1 ( 1997 ) . Crossref, Web of Science, Google Scholar
- Economic Theory 35 , 343 ( 2008 ) . Crossref, Web of Science, Google Scholar
- Journal of Economic Theory 29 , 185 ( 1983 ) . Crossref, Web of Science, Google Scholar
- Quantitative Finance 11 , 1439 ( 2011 ) . Crossref, Web of Science, Google Scholar
- Journal of Banking and Finance 31 , 2632 ( 2007 ) . Crossref, Web of Science, Google Scholar
- W. Goetzmann, J. Ingersoll, M. Spiegel & I. Welch (2002) Sharpening Sharpe ratios, Working Paper No. 9116, National Bureau of Economic Research . Google Scholar
- Review of Financial Studies 20 , 1503 ( 2007 ) . Crossref, Web of Science, Google Scholar
- Financial Analysts Journal 62 , 47 ( 2006 ) . Crossref, Web of Science, Google Scholar
- Journal of Banking and Finance 36 , 2274 ( 2012 ) . Crossref, Web of Science, Google Scholar
- Quantitative Finance 3 , 117 ( 2003 ) . Crossref, Web of Science, Google Scholar
- International Journal of Theoretical and Applied Finance 14 , 465 ( 2011 ) . Link, Google Scholar
- Journal of Multinational Financial Management 17 , 401 ( 2007 ) . Crossref, Google Scholar
- American Economic Review 77 , 421 ( 1987 ) . Web of Science, Google Scholar
- American Economic Review 79 , 603 ( 1989 ) . Web of Science, Google Scholar
- Economic Journal 102 , 91 ( 1992 ) . Crossref, Web of Science, Google Scholar
- Journal of Financial and Quantitative Analysis 16 , 361 ( 1981 ) . Crossref, Web of Science, Google Scholar
- International Journal of Theoretical and Applied Finance 11 , 19 ( 2008 ) . Link, Web of Science, Google Scholar
- Zeitschrift für Betriebswirtschaft 82 , 685 ( 2012 ) . Crossref, Google Scholar
- Journal of Banking and Finance 35 , 2311 ( 2011 ) . Crossref, Web of Science, Google Scholar
- Journal of Banking and Finance 36 , 2077 ( 2012 ) . Crossref, Web of Science, Google Scholar
- European Journal of Operational Research 239 , 756 ( 2014 ) . Crossref, Web of Science, Google Scholar
- Quantitative Finance 14 , 775 ( 2014 ) . Crossref, Web of Science, Google Scholar
- Economics Letters 116 , 124 ( 2012 ) . Crossref, Web of Science, Google Scholar
- Journal of Business 39 , 119 ( 1966 ) . Crossref, Google Scholar
-
H. W. Sinn , Ökonomische Entscheidungen bei Unsicherheit ( Mohr , Tübingen , 1980 ) . Google Scholar -
H. W. Sinn , Economic Decisions under Uncertainty ( North-Holland , Amsterdam , 1983 ) . Google Scholar - American Economic Review 79 , 601 ( 1989 ) . Web of Science, Google Scholar
- Journal of Banking and Finance 33 , 1242 ( 2009 ) . Crossref, Web of Science, Google Scholar
Remember to check out the Most Cited Articles! |
---|
Be inspired by these new titles
|