Mind Coskewness: A Performance Measure for Prudent, Long-Term Investors

Abstract

This study examines how negative skewness a¤ects the behaviour of prudent investors. It also shows how the commonly used frame- work in the intertemporal asset pricing and the dynamic portfolio- consumption choice literature can generate negative skewness in asset reutrns. Given this impact, an extra premium is required in order to hold an asset with negatively coskewed returns. This premium was, on average, 2.09% p.a. for the UK stock market universe. Hence, a new performance measure, the intercept of the Harvey-Siddique two-factor asset pricing model is suggested for prudent, long-term investors. Us- ing this model, the performance of UK unit trusts is examined over the period 1991-2005. Despite exhibiting signi.cantly negative mana- gerial ability, trust managers were successful in reaping part of this negative coskewness premium.