Publication: The value of coskewness in evaluating mutual funds
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2008-12
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Abstract
Recent asset pricing studies demonstrate the relevance of incorporating the coskewness in Asset
Pricing Models, and illustrate how this component helps to explain the time variation of ex-ante
market risk premiums. This paper analyzes the role of coskewness in mutual funds performance
evaluation. We find evidence that adding a coskewness factor is economically and statistically
significant. We document that some managers are managing the coskewness and show, in general,
a persistent behaviour on time in their coskewness policy. One of the most striking results is that
many negative (positive) alpha funds measured relative to the CAPM risk adjustments would be
reclassified as positive (negative) alpha funds using a model with coskewness. Therefore, a ranking
of funds based on risk adjusted returns without considering coskewness would generate an
erroneous classification. Moreover, some fund characteristics, such as the turnover ratio or the
category, are related to the likelihood of managing coskewness.
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Mutual funds, Performance measures, Coskewness