Does Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns?
46 Pages Posted: 15 Mar 2011
Date Written: March 12, 2011
Yes. We use intraday data to compute weekly realized variance, skewness and kurtosis for individual equities and assess whether this week’s realized moments predict next week’s stock returns in the cross-section. We sort stocks each week according to their past realized moments, form decile portfolios and analyze subsequent weekly returns. The data shows a very strong negative relationship between stock returns and realized skewness and a clear positive relation between stock returns and realized kurtosis. We do not find a strong relationship between realized volatility and stock returns. A trading strategy that buys stocks in the lowest realized skewness decile and sells stocks in the highest realized skewness decile generates an average weekly return of 43 basis points with a t-statistic of 8.91. A similar strategy that buys stocks with high realized kurtosis and sells stocks with low realized kurtosis produces a weekly return of 16 basis points with a t-statistic of 2.12. Our results are robust across sample periods, portfolio weightings, and proxies for firm characteristics, and they are not captured by the Fama-French and Carhart factors.
Keywords: realized volatility, skewness, kurtosis, equity markets, return prediction
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation