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

58 Pages Posted: 31 Jul 2011 Last revised: 10 Mar 2015

Diego Amaya

Wilfrid Laurier University

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - 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 9, 2015

Abstract

We use intraday data to compute weekly realized variance, skewness, and kurtosis for equity returns and study the realized moments' time-series and cross-sectional properties. We investigate if this week's realized moments are informative for the cross-section of next week's stock returns. We find a very strong negative relationship between realized skewness and next week's 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 19 basis points with a t-statistic of 3.70. Our results on realized skewness are robust across a wide variety of implementations, sample periods, portfolio weightings, and firm characteristics, and are not captured by the Fama-French and Carhart factors. We find some evidence that the relationship between realized kurtosis and next week's stock returns is positive, but the evidence is not always robust and statistically significant. We do not find a strong relationship between realized volatility and next week's stock returns.

Keywords: Realized volatility, skewness, kurtosis, equity markets, cross-section of stock returns

JEL Classification: G11, G12, G17

Suggested Citation

Amaya, Diego and Christoffersen, Peter and Jacobs, Kris and Vasquez, Aurelio, Does Realized Skewness Predict the Cross-Section of Equity Returns? (March 9, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898735 or http://dx.doi.org/10.2139/ssrn.1898735

Diego Amaya

Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - 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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