Negative skewness, or: bulls walk up stairs, bears jump out of windows

Negative skewness, or: bulls walk up stairs, bears jump out of windows

Recent market performance in the market is a good reminder asymmetrical. Under normal circumstances, the stock market rise is not like the stock market fell. Slowly stock rally lasted barely a few months, but lost all of these results just a few days. There are many famous crash stock, including 1914, 1929, 1987, and 2008, but almost no famous "melt window."

Like the Inuit have many words of snow, because they are surrounded by things, there are a lot of words critics stock crash (panic selling, etc.). These events are not uncommon. In the same way, many African indigenous languages ​​have no words for snow, we lack a good word to describe one of the equity market for two days melt-ups, because these are not part of our landscape.

Some describe this pattern of traders motto, including bull stairs, jump out the window and change bear on the subject. In the economic literature, this phenomenon is called negative skewness. If you look at every day% return on the S & P 500 index distribution in a long time, you will find a more extreme extreme positive results than negative results, with the majority of the results slightly positive. And a normal distribution, or bell curve, we have seen in the statistics class, is symmetrical 95% of the value of the average value of two standard deviations housing, a negative skewness has left a fat tail, which It fell far beyond what you would expect a normal distribution of the data set.

The following figure illustrates this point. Beyond the 22,013 trading day dates back to 1928, the days of only 47.8%, a negative result, while 52.2% had positive results. It makes sense to give the stock market during this general upward trajectory. If we return to the bucket every day sort of asymmetrical development we begin to see. For example, there are 10973 heaven market higher or lower from 0.5%, of which only 48.4 per cent lower. Most of 0.5~1% 1-2% change and is to the positive side as well. Once we look at two percent, than fighting the distribution changes. Most of the 1,485 days (51.9%), "extreme" returns, changes of 2% or greater decline, instead of + 2% or greater increase.

Negative skewness, or: bulls walk up stairs, bears jump out of windows
Figure: Distribution of daily changes in the S&P 500 index going back to 1928

There are many hypotheses financial economist negative skewness. There is a theory blamed lever, resulting in a company's stock price falls triggered its leverage, or to the amount of debt financing for itself. This makes the company a greater investment risk and lead to higher volatility of its share price. Conversely, when the stock rises, its leverage declined, causing the share price risk is small. For this reason, the rise and fall of the stock is tame wild. Although an attractive theory, the data show, the stock price falls, the whole experience of the company's equity financing jump volatility in the company's leverage the same size, which indicates that there is no good explanation leverage negative skewness model.

Another explanation is the presence of "volatility feedback." When important news, which indicates that market volatility has increased. If it is good news, investors will be part of the festive fluctuations offset by increased wariness over the final stock price change is smaller than it would otherwise yes. If it is bad news, disappointment will be strengthened in this wary enlarge decline.

Other theories blamed short selling restrictions asymmetry. If the bearish investors express their pessimism constraints, they will be forced to the sidelines and their information will not be fully integrated into the price. When the Bulls began to bail out the stock, put the group to become the marginal buyer, then the bad information is finally "discovered" the market, with the result that large price decline.

The reason aside, behavioral finance types have some interesting things to say about how investors look skewed. According to prospect theory, investors are not fully rational decision makers. First of all, the return to a symmetrical manner not appraised; 5% of the loss hurt more than 5% of the increase, more investors feel good. Next, investors are unlikely holdings event and average weight people. Given these two quirks, investors may be more inclined to positive skewness of assets (such as government bonds), which has a much larger decline less than the normal deflection assets, this distribution reduces the likelihood of psychological harm. The odds are relatively positive possibilities of investors overweight the actual payout odds Lotto-like returns, but also led asset preferences positive skewness. Such as stocks ETF, which expose investors tortuous decline, rather than providing a huge potential, large-scale melt-ups, negative equity tilt, so as to avoid.

In other words, positive skewness, investors will have a function. Negative skew is a "bad" people need to live with it to compensate.

If you buy the theory, then in order to hold a negative bias to coax investors into assets like stocks, sellers need to purchase is expected to provide higher returns. The presence of this carrot may be one reason why the stock is often better than the bond over time. For equity owners who are through the current economic downturn, the pain, the result here is: negative skew events, such as the present, although there is pressure, it may be the price you have to gain long-term stock to pay high returns.

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