Skewness Risk (Paperback)

High Quality Content by WIKIPEDIA articles! Skewness risk in financial modeling denotes that observations are not spread symmetrically around an average value. As a result, the average and the median can be different. Skewness risk applies to any quantitative model that relies on a symmetric distribution.Ignoring skewness risk, by assuming that variables are symmetrically distributed when they are not, will cause any model to understate the risk of variables with high skewness. Skewness risk plays an important role in hypothesis testing. The analysis of variance, the most common test used in hypothesis testing, assumes that the data is normally distributed. If the variables tested are not normally distributed because they are too skewed, the test cannot be used. Instead, nonparametric tests can be used, such as the Mann-Whitney test for unpaired situation or the sign test for paired situation.