Performance Measures And Incentives: Loading Negative Coskewness To Outperform the CAPM

This paper examines the incentives in fund management due to the adoption of specific performance measures. A mean-variance measure such as Jensen's alpha incentivizes fund managers to load negative coskewness risk. This risk is shown to be priced in the UK stock market during the period January 1991-December 2005, bearing a premium of 2.09% p.a. Hence, a new performance measure, the intercept of the Harvey-Siddique two-factor asset pricing model is proposed to be more appropriate for prudent investors.