types of kurtosis

In finance, kurtosis is used as a measure of financial riskFinancial Risk ModelingFinancial risk modeling is the process of determining how much risk is present in a particular business, investment, or series of cash flows. The blue line in the above picture represents a Mesokurtic distribution. Kurtosis is a statistical measure that defines how heavily the tails of a distribution differ from the tails of a normal distribution. This has been a guide to What is Kurtosis & its Definition. But differences in the tails are easy to see in the normal quantile-quantile plots (right panel). Thus leptokurtic distributions are sometimes characterized as "concentrated toward the mean," but the more relevant issue (especially for investors) is there are occasional extreme outliers that cause this "concentration" appearance. However, when high kurtosis is present, the tails extend farther than the + or - three standard deviations of the normal bell-curved distribution. Skewness essentially measures the symmetry of the distribution, while kurtosis determines the heaviness of the distribution tails. Whenever the kurtosis is less than zero or negative, it refers to Platykurtic. Distributions with low kurtosis exhibit tail data that are generally less extreme than the tails of the normal distribution. However, kurtosis is a measure that describes the shape of a distribution's tails in relation to its overall shape. An investment following leptokurtic distribution is said to be a risky investment, but it can also generate hefty returns to compensate for the risk. Below is the pictorial representation of the kurtosis (all three types, each one is explained in detail in the subsequent paragraph) #1 – Mesokurtic. Therefore, an investment whose returns follow a leptokurtic distribution is considered to be risky. A bell curve describes the shape of data conforming to a normal distribution. Greater the deviation from the mean means the returns are also high for that particular investment. Here we discuss the types of kurtosis along with its significance, advantages, and applications in Finance. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. 1) Platykurtic - negative kurtosis value indicating a flatter distribution that normal bell curve. Skewness is a measure of symmetry in distribution, whereas the kurtosis is the measure of heaviness or the density of distribution tails. Like skewness, kurtosis is a statistical measure that is used to describe distribution. This means that the data set follows a normal distribution. Mesokurtic is a statistical term describing the shape of a probability distribution. Learn risk analysis. Types of Kurtosis. Discover more about mesokurtic distributions here. The green curve on the above picture represents the leptokurtic distribution. It means the generated returns can either be very high or very low as per the outliers in the distribution. This is calculated on the data set of the investment; the value obtained can be used to depict the nature of the investment. In other words, kurtosis identifies whether the tails of a given distribution contain extreme values. You can learn more about from the following article –, Copyright © 2020. INDEX, MATCH, and INDEX MATCH MATCH Functions, Combining CELL, COUNTA, MID and OFFSET in a Formula. In finance, such a pattern depicts risk at a moderate level. Below is the pictorial representation of the kurtosis (all three types, each one is explained in detail in the subsequent paragraph). Also, the small outliers and flat tail indicate the less risk involved in such investments. This can swing both the ways that are either positive returns of extreme negative returns. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Black Friday Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, Financial Modeling Course (with 15+ Projects), 16 Courses | 15+ Projects | 90+ Hours | Full Lifetime Access | Certificate of Completion. In finance, a leptokurtic distribution shows that the investment returns may be prone to extreme values on either side.

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