Skewness in Stock Returns: Reconciling the Evidence on Firm versus Aggregate Returns
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
September 30, 2010
AFA 2012 Chicago Meetings Paper
Aggregate stock market returns display negative skewness. Firm-level stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This paper provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to negative skewness in aggregate returns. I provide evidence consistent with the model predictions.
Number of Pages in PDF File: 51
Keywords: Skewness, market returns, firm returns, announcement events, cross-sectional heterogeneity
JEL Classification: G12, G14, D82working papers series
Date posted: June 9, 2010 ; Last revised: March 16, 2011
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