Does Realized Skewness Predict the Cross-Section of Equity Returns?
58 Pages Posted: 31 Jul 2011 Last revised: 10 Mar 2015
Date Written: March 9, 2015
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: Suggested Citation