Conditional Skewness of Aggregate Market Returns

32 Pages Posted: 13 Oct 2008

See all articles by Anchada Aida Charoenrook

Anchada Aida Charoenrook

Thammasat University

Hazem Daouk

Cornell University - School of Applied Economics and Management

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Date Written: May 2008

Abstract

The skewness of the conditional return distribution plays a significant role in financial theory and practice. This paper examines whether conditional skewness of daily aggregate market returns is predictable and investigates the economic mechanisms underlying this predictability. In both developed and emerging markets, there is strong evidence that lagged returns predict skewness; returns are more negatively skewed following an increase in stock prices and returns are more positively skewed following a decrease in stock prices. The empirical evidence shows that the traditional explanations such as the leverage effect, the volatility feedback effect, the stock bubble model (Blanchard and Watson, 1982), and the fluctuating uncertainty theory (Veronesi, 1999) are not driving the predictability of conditional skewness at the market level. The relation between skewness and lagged returns is more consistent with the Cao, Coval, and Hirshleifer (2002) model. Our findings have implications for future theoretical and empirical models of time-varying market return distributions, optimal asset allocation, and risk management.

Keywords: Conditional skewness, Conditional Volatility, Predicting Skewness, Aggregate market returns, International finance

Suggested Citation

Charoenrook, Anchada Aida and Daouk, Hazem, Conditional Skewness of Aggregate Market Returns (May 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI, Available at SSRN: https://ssrn.com/abstract=1282127 or http://dx.doi.org/10.2139/ssrn.1282127

Anchada Aida Charoenrook

Thammasat University ( email )

Thammasat Business School
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Thailand
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Hazem Daouk (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

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United States
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