The Value of Coskewness in Mutual Fund Performance Evaluation Articles uri icon

publication date

  • September 2009

start page

  • 1664

end page

  • 1676

issue

  • 9

volume

  • 33

international standard serial number (ISSN)

  • 0378-4266

electronic international standard serial number (EISSN)

  • 1872-6372

abstract

  • Recent asset pricing studies demonstrate the relevance of incorporating 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 fund performance evaluation and finds evidence that adding a coskewness factor is economically and statistically significant. It documents that coskewness is sometimes managed and shows persistence of the coskewness policy over time. 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, performance ranking based on risk-adjusted returns without considering coskewness could generate an erroneous classification. Moreover, some fund characteristics, such as turnover ratio or category, are related to the likelihood of managing coskewness.