What does Platykurtic mean?
The term “kurtosis” refers to a statistical distribution with a negative excess kurtosis value. As a result, the plate distribution has a thinner tail than the normal distribution and has fewer extreme positive or negative events. The opposite of the plate-like kurtosis distribution is the leptocurt distribution with positive excess kurtosis.
Investors consider which statistical distributions are associated with different types of investments when deciding where to invest. Investors who are more risk-averse may prefer assets and markets with a plate-like distribution because their assets are less likely to produce extreme results.
- The Platykurtic distribution is a distribution with negative excess kurtosis.
- Compared to the normal distribution, it is less likely to be an extreme event.
- To minimize the risk of large-scale negative events, risk-averse investors can focus on investments whose returns follow a plate-like distribution.
Understanding Platykurtic distribution
There are three basic types of statistical distributions: leptocrtic, meso-curtic, and platy-curtic. These distributions depend on the amount of excess kurtosis associated with the probability of extreme positive or negative events. The kurtosis of the normal distribution, which is a type of neutral distribution, is 3. Therefore, a distribution with a kurtosis greater than 3 is said to be “positive excess kurtosis” and a distribution with a kurtosis less than 3 is said to be “negative excess kurtosis”.
The mesokurtic distribution has three kurtosis, while the leptokurtic and platykurtic distributions have positive and negative excess kurtosis, respectively. Therefore, the leptocrtic distribution is more likely to be an extreme event, while the plastic distribution is the opposite.
The following figure shows a graph of these three types of distributions, all with the same standard deviation. The figure on the left does not show much difference in the tails of these distributions, while the figure on the right shows a clearer view by plotting the quantiles of the distributions against each other. This technique is known as Quantile-Quantile Plot, or QQ for short.
Most investors believe that stock market returns are more like a Leptkult distribution than a plate-like distribution. That is, most returns are likely to be similar to the average return for the entire market, but returns can be significantly off average. These dramatic and unpredictable events, sometimes referred to as black swans, are less likely to occur in the plate market.
As a result, more cautious investors may avoid investing in the leptocurtic market and focus on investing in providing platycurtic returns. On the other hand, some investors are deliberately pursuing investments with leptometric returns, believing that extreme positive returns are more than compensating for extreme negative returns.
A real-life example of a Platykurtic distribution
In 2011, Morning Star published a research paper containing information on the levels of excess sharpness of various types of assets observed between February 1994 and June 2011. The list included a wide range of investments, from US and international equities to real estate and commodities. , Cash, and bonds.
The level of excess kurtosis changed as well. At the bottom of the spectrum were cash and international bonds, with excess kurtosis of -1.43 and 0.58, respectively. At the other end of the spectrum is the US high yield bond and hedge fund arbitrage strategy, which provided excessive kurtosis of 9.33 and 22.59.
Moderate excess kurtosis asset classes include international real estate (2.61), international emerging economies equities (1.98), and commodities (2.29).
Investors looking at this data can quickly identify the type of asset they want to invest in, given their tolerance for potential Black Swan events. Risk-averse investors who want to minimize the likelihood of extreme events can focus on low-sharp investments, while investors accustomed to extreme events can focus on sharp-edged investments. increase.