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)
August 12, 2011
Abstract:
Aggregate stock market returns display negative skewness. Firm 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 conditional asymmetric stock return correlations and negative skewness in aggregate returns. I provide evidence consistent with the model predictions.
Number of Pages in PDF File: 57
Keywords: Skewness, earnings announcements, dividend announcements, cross-sectional heterogeneity
JEL Classification: G12, G14, D82
working papers series
Suggested Citation
Albuquerque, Rui A., Skewness in Stock Returns: Reconciling the Evidence on Firm Versus Aggregate Returns (August 12, 2011). Available at SSRN: http://ssrn.com/abstract=1799413 or http://dx.doi.org/10.2139/ssrn.1799413
