- AiLA asset returns refer to the (%) returns obtained by being long or short a single asset, e.g. the CME Corn Dec22 futures contract, according to the AiLA allocation signals generated for that asset.
- We distinguish between daily asset returns vs returns compounded over a period, since different potential sources of skew could affect the results differently, e.g.
- Skew generated by the AiLA upstream modelling might have similar impact on the two return types.
- Whereas the risk/reward targets implying asymmetric allocation exits, might introduce a skew primarily affecting the compounded returns.
- Here the compounded returns are obtained over the actual period a given allocation was held, i.e. period can vary for each return.
- It should be noted that compounded returns can obtain a positive skew purely from the compounding [Farago22]. However, due to the modest volatility as well as investment periods covered in this study, these contributions to the skew are estimated to be significantly smaller than the effects observed.
[Farago22]: A.Farago and E.Hjalmarsson, Long-Horizon Stock Returns Are Positively Skewed, Review of Finance (2022) 1–44.