Does Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns?

46 Pages Posted: 15 Mar 2011

See all articles by Diego Amaya

Diego Amaya

Wilfrid Laurier University

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Aurelio Vasquez

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

Date Written: March 12, 2011

Abstract

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

Amaya, Diego and Christoffersen, Peter and Jacobs, Kris and Vasquez, Aurelio, Does Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns? (March 12, 2011). Available at SSRN: https://ssrn.com/abstract=1785736 or http://dx.doi.org/10.2139/ssrn.1785736

Diego Amaya (Contact Author)

Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Aurelio Vasquez

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration ( email )

Rio Hondo No. 1
Col. Tizapan-San Angel, 01000
Mexico

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