ScholarLens Back to search
2018•The Journal of Portfolio ManagementRequires access

A Case for Tail-Risk-Based Sharpe Ratios

James X. Xiong, Thomas M. Idzorek

Open publisher page 4 citations

Abstract

Surprisingly to many investors, low volatility tends to be accompanied with an undesirable risk characteristic: lower or negative skewness. A stock or fund can rank well based on the standard Sharpe ratio but low on enhanced tail-risk-based Sharpe ratios that account for non-normal returns, and vice versa. The authors quantify these economically meaningful ranking differences and show that skewness dominates other variables in explaining the ranking variations for the Conditional Value-at-Risk (CVaR)-based Sharpe ratio. Both skewness and serial correlation play important roles in the ranking variations for the maximum drawdown-based Sharpe ratio. TOPICS:Analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk

About this research paper

What this paper is about

Surprisingly to many investors, low volatility tends to be accompanied with an undesirable risk characteristic: lower or negative skewness. A stock or fund can rank well based on the standard Sharpe ratio but low on enhanced tail-risk-based Sharpe ratios that account for non-normal returns, and vice versa. The authors quantify these economically meaningful ranking differences and show that skewness dominates other variables in explaining the ranking variations for the Conditional Value-at-Risk (CVaR)-based Sharpe ratio. Both skewness and serial correlation play important roles in the ranking variations for the maximum drawdown-based Sharpe ratio. TOPICS:Analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk

Why it matters

OpenAlex reports 4 citations for this work. Citation counts describe recorded attention and do not establish research quality.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

Surprisingly to many investors, low volatility tends to be accompanied with an undesirable risk characteristic: lower or negative skewness. A stock or fund can rank well based on the standard Sharpe ratio but low on enhanced tail-risk-based Sharpe ratios that account for non-normal returns, and vice versa. The authors quantify these economically meaningful ranking differences and show that skewness dominates other variables in explaining the ranking variations for the Conditional Value-at-Risk (CVaR)-based Sharpe ratio. Both skewness and serial correlation play important roles in the ranking variations for the maximum drawdown-based Sharpe ratio. TOPICS:Analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk

Key concepts: Sharpe ratio, Skewness, Econometrics, Economics, Volatility (finance), Ranking (information retrieval), Expected shortfall, Stock (firearms)

Related papers

Related paper 1Related paper 2Related paper 3
Back to paper searchBrowse research topicsOriginal source
A Case for Tail-Risk-Based Sharpe Ratios — Research Paper | ScholarLens