Purpose – The purpose of this paper is to introduce a non-normality premium (NNP) to identify the extra return that will compensate an investor for a non-normal return distribution. The NNP quantifies the economic significance of non-normality to complement a statistical significance test of non-normality, such as the Jarque-Bera test. Design/methodology/approach – The NNP is patterned after the risk premium, the amount that compensates an investor for the risk of an investment. The theoretical NNP is examined on the margins with Taylor series approximation and applied to hedge fund data. Findings – An increase of 1 in the skewness has the same effect on an investor as an increase in the mean of 2.5 basis points per month. An increase of 1 in the kurtosis has the same effect on an investor as a decrease in the mean of 0.15 basis points per month. A sample of 716 hedge funds revealed that while 72 per cent statistically reject normality, only 29 per cent require more than a single basis point per month difference in the mean to compenscate an investor for the non-normality. Originality/value – The NNP allows for a valuation on the higher moments (skewness and kurtosis) of an investor's return distribution. The evaluation is tailored to the individual through use of a utility function. Once applied to an alternative investment vehicle, it is learned that rejecting normality is not sufficient grounds to suspect that the non-normality is important to investors.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Article provided by Emerald Group Publishing in its journal Managerial Finance.
Volume (Year): 35 (2009) Issue (Month): 4 (March) Pages: 385-403 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF