Horizontal Skew

Categories: Derivatives, Trading

We’re used to seeing that nice, symmetrical, Normal curve (a.k.a. the Bell Curve), with its identical tails mirroring each other on opposite sides of the hump. But there are renegade curves out there that aren’t quite so nice. Some curves have a hugely long tail running off in one direction, while there’s almost no tail in the other direction. When we have a long tail in one direction (but not both), we have a horizontal skew.

Salaries at a large company display such a skew. We’ll have tons of people who work on the line or in cubicles that all make around thirty-ish thousand dollars. Think of the top of the huge hump in the distribution here at these lower salaries because so many employees make that amount. Then you have middle managers who make maybe seventy-ish thousand, but there are far fewer, so our huge hump starts to decline quite quickly. Then we have the CEO and CFO and so on, who make scads of money, but there are only like 2 of these, so we have this long tail running off to the right where those huge salaries are, but it’s barely above the axis, because there are so few who make that salary.

Not to be confused with horizontal spew, which is what Linda Blair did in The Exorcist.

Find other enlightening terms in Shmoop Finance Genius Bar(f)