Accounting for Skewness in Performance Evaluation of Brazilian Mutual Funds

Banking and Finance Review, Vol. 1, pp. 119-132, 2009

14 Pages Posted: 13 May 2009 Last revised: 20 Jun 2011

See all articles by Aquiles Farias

Aquiles Farias

Government of the Federative Republic of Brazil - Central Bank of Brazil

Jose Renato Haas Ornelas

Banco Central do Brasil

Antonio F. A. Silva Jr.

Federal University of Bahia - UFBA

Date Written: May 11, 2009

Abstract

The Sharpe Ratio is probably the most widely known and used performance measure for mutual fund evaluation. However, it is based on the mean-variance theory and thus it is valid either for Normal returns or for quadratic utility functions. It does not take into account skewness of returns’ distributions. If we consider investors with negative skewness aversion, it is interesting to have a measure that goes beyond mean-variance. Koekebakker and Zakamouline (2009) propose a measure called ASSR (Adjusted for Skewness Sharpe Ratio) that generalizes the Sharpe ratio, accounting also for the skewness. However, the ASSR may result in imaginary numbers under certain conditions. In fact, in our sample many funds got imaginary numbers for the ASSR. Thus, we propose a new measure that does not have to deal with imaginary numbers, but maintains the main features of the original measure of Koekebakker and Zakamouline. We use the new measure to rank Brazilian Fixed Income and Multimarkets funds. Results show a very low ranking correlation between the new measure and the Sharpe Ratio, suggesting that skewness is an important issue when analyzing Brazilian mutual funds.

Keywords: Sharpe Ratio, Skewness, Performance Evaluation

JEL Classification: G11

Suggested Citation

Farias, Aquiles and Ornelas, Jose Renato Haas and Silva Jr., Antonio F. A., Accounting for Skewness in Performance Evaluation of Brazilian Mutual Funds (May 11, 2009). Banking and Finance Review, Vol. 1, pp. 119-132, 2009. Available at SSRN: https://ssrn.com/abstract=1402945

Aquiles Farias

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia DF 70074-900, Distr. Federal 70074-900
Brazil

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

Antonio F. A. Silva Jr.

Federal University of Bahia - UFBA ( email )

Av. Reitor Miguel Calmon, s/n
Vale do Canela
Salvador, Bahia
Brazil

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