Sharpe Ratio for Skew-normal Distributions: A Skewness-dependent Performance Trade-off
$25
Main academic criticism of the Sharpe ratio concerns its lack of incorporating skewness in performance evaluation. In this paper we rewrite the classical Sharpe ratio for skew-normal distributions. This new skew-normal Sharpe ratio consistently moves with skewness, and no distorted information on performance is provided. An empirical investigation illustrates skew-normality of mutual and hedge fund returns.
Authors: Martin Eling, Ph.D., University of Ulm & Luisa Tibiletti, Ph.D., University of Torino
Main academic criticism of the Sharpe ratio concerns its lack of incorporating skewness in performance evaluation. In this paper we rewrite the classical Sharpe ratio for skew-normal distributions. This new skew-normal Sharpe ratio consistently moves with skewness, and no distorted information on performance is provided. An empirical investigation illustrates skew-normality of mutual and hedge fund returns.
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