Where are the Fat Tails?

June 19, 2012

(This article was first published on Timely Portfolio, and kindly contributed to R-bloggers)

In Crazy RUT, I started to explore why the moving average strategy has failed for the last 2 decades on the Russell 2000.  I still do not have an answer, but I thought looking at skewness and kurtosis might help explain some of the challenge of beating this index.  I think–but don’t have as much rigid objective evidence as I would like–that moving average systems work best when skew is negative and kurtosis is positive because that implies that the bad stuff happens below the mean when you would be out.

The Russell 2000 has been remarkably tame in terms of skewness and kurtosis even including 2008-2009.

From TimelyPortfolio
From TimelyPortfolio

R code from GIST (do raw for copy/paste):

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