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Skewness in Stock Returns: Reconciling the Evidence on Firm versus Aggregate Returns

AFA 2012 Chicago Meetings Paper

51 Pages Posted: 9 Jun 2010 Last revised: 16 Mar 2011

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: September 30, 2010

Abstract

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.

Keywords: Skewness, market returns, firm returns, announcement events, cross-sectional heterogeneity

JEL Classification: G12, G14, D82

Suggested Citation

Albuquerque, Rui A., Skewness in Stock Returns: Reconciling the Evidence on Firm versus Aggregate Returns (September 30, 2010). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1622343 or http://dx.doi.org/10.2139/ssrn.1622343

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://sites.google.com/view/ruialbuquerque/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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