The Impact of Skew on Performance and Bias: How Skew Distorts Short Term Performance, Triggers Bias, and Changes Drawdowns

18 Pages Posted: 26 Jan 2019

See all articles by Zack Dugan

Zack Dugan

ISAM; Johns Hopkins University Institute of Data Intensive Engineering and Science

Alexander Greyserman

ISAM; Columbia University - Department of Mathematics

Date Written: January 14, 2019

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

Suggested Citation

Dugan, Zack and Greyserman, Alexander, The Impact of Skew on Performance and Bias: How Skew Distorts Short Term Performance, Triggers Bias, and Changes Drawdowns (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=3315740 or http://dx.doi.org/10.2139/ssrn.3315740

Zack Dugan (Contact Author)

ISAM ( email )

5100 Town Center Circle
Suite 430
Boca Raton, FL 33686
United States

Johns Hopkins University Institute of Data Intensive Engineering and Science ( email )

3400 N. Charles St
Baltimore, MD 21218
United States

Alexander Greyserman

ISAM

5100 Town Center Circle
Suite 430
Boca Raton, FL 33686
United States

Columbia University - Department of Mathematics

United States

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