DEFINITION of 'Coskewness'

Coskewness, in statistics, measures how much three random variables change together, and is used in finance to analyze security and portfolio risk. If two random variables exhibit positive coskewness, they will tend to undergo positive deviations at the same time. But if they exhibit negative coskewness, they will tend to undergo negative deviations at the same time.

BREAKING DOWN 'Coskewness'

Coskewness is a measure of securities’ risk in relation to market risk, and was first used to analyze risk in stock market investments by Krauss and Litzenberger in 1976, and then by Harvey and Siddique in 2000. Skewness measures the frequency of excess returns in a particular direction, which describes an asymmetry from the normal distribution.

Coskweness is much like covariance, which is used in the capital asset pricing model as a measure of the volatility, or systematic risk, of a security in relation to the market as a whole – which is otherwise known as beta. Thus, assets with higher covariance contribute more to the variance of a well-diversified market portfolio – and should command a larger risk premium.

Investors prefer positive coskewness, because this represents a higher probability that two assets in a portfolio will show extreme positive returns in excess of market returns at the same time. If the return distributions of these two assets tended to exhibit negative coskewness, it would mean that both assets have a higher probability of underperforming the market at the same time.

Everything else being equal, an asset with higher coskewness should be more attractive as it increases the systematic skewness of an investor's portfolio. Assets with higher coskewness should provide a hedge against periods when the benefits of portfolio diversification deteriorate; such as during periods of high market volatility, when correlations between various asset classes tend to rise sharply. In theory, positive coskewness reduces the risk of a portfolio and lowers the expected return, or risk premium. Emerging markets, for example, is an asset class that might reduce portfolio variance, because it is more “right-skewed."

  1. Cokurtosis

    Cokurtosis is used to measure the extent to which a security ...
  2. Risk Management

    Risk management occurs anytime an investor or fund manager analyzes ...
  3. Covariance

    Covariance is a measure of the directional relationship between ...
  4. Random Variable

    A random variable is a variable whose value is unknown or a function ...
  5. Market Risk

    Market risk is the possibility of an investor experiencing losses ...
  6. Dispersion

    Dispersion is a statistical term that describes the size of the ...
Related Articles
  1. Investing

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in modern portfolio theory to quantify investment risk.
  2. Investing

    How to Diversify Your Portfolio Beyond Stocks

    Find out how to get diversified in asset classes beyond stocks to reduce portfolio risk. Learn how diversification can help you reach your financial goals.
  3. Investing

    Two Approaches to Building a Low-Risk Portfolio

    Building a portfolio consisting of low-risk assets is achieved primarily by using one of two principal low-volatility strategies.
  4. Managing Wealth

    Modern Portfolio Theory: Why It's Still Hip

    Investors still follow an old set of principles, known as modern portfolio theory (MPT), that reduce risk and increase returns through diversification.
  5. Investing

    Diversify Your Strategies, Not Your Assets

    Find out how to achieve true portfolio diversification where the benefits are real and pro­vide tangible results. Learn how to identify return drivers.
  6. Investing

    Understand Risk Before You Diversify

    Before investors can use diversification to maximize investment returns, they need to understand unsystematic risk and systematic risk.
  7. Investing

    Why Standard Deviation Should Matter to Investors

    Think of standard deviation as a thermometer for risk, or better yet, anxiety.
  8. Investing

    Find the right fit with probability distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  9. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either. Find out how to maintain a well-balanced set of investments.
  1. How does covariance impact portfolio risk and return?

    Understand how covariance is related to the risk and return of a portfolio of stocks, and learn how covariance is used to ... Read Answer >>
  2. How do you interpret the magnitude of the covariance between two variables?

    Learn more about covariance and how financial planners and economists use the concept. Explore an example of covariance in ... Read Answer >>
  3. How do you calculate beta in Excel?

    Learn how to calculate the beta of an investment using Microsoft Excel. Read Answer >>
  4. What are some common measures of risk used in risk management?

    Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >>
  5. How does Beta reflect systematic risk?

    Learn what systematic risk is, what beta is and how it is related to market indexes, and how beta reflects the systematic ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center