Statistics

Skewness

A measure of distributional asymmetry around the mean.

Negative skew means a long left tail - frequent small gains and occasional large losses.

Equity index returns are negatively skewed, which is one reason the volatility smile shows as a skew rather than a symmetric smile: the market prices a fatter left tail.

The strategy warning. Selling options, carry trades and many "steady income" strategies are negatively skewed by construction. They produce attractive Sharpe ratios and hide their risk in a tail that Sharpe cannot see. Asking about skew is how you find the risk that the headline statistics conceal.

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