Changes of Skewness and Coskewness in Latin American Stock Returns: Behavioral vs. Fundamental Factors

44 Pages Posted: 17 Jan 2012

See all articles by Michael Adler

Michael Adler

Columbia Business School - Finance and Economics

Rong Qi

ING Aeltus Asset Management

Date Written: January 16, 2012

Abstract

In this paper, we study stock market skewness/coskewness for seven Latin American emerging markets including Argentina, Brazil, Chile, Mexico, Colombia, Peru and Venezuela. Unlike the US, skewness in these countries is normally positive and driven by fundamentals. We find, however, that the skewness/coskewness of these emerging markets is time-varying and declines sharply during economic and political crises. During crises, panicked investors sell their securities producing sharp price declines that reduce skewness below its normal levels. This is the essence of our behavioral account. The result of the panic selling is also to produce increases in firms’ risks of default and illiquidity, both being factors that seem to be priced. We also find that firms with low skewness/coskewness command a risk premium, even when we control for other factors such as size, price-to-book ratio, liquidity risk and default risk. The pricing power of skewness and coskewness is consistent with the findings from developed countries such as U.S., but the statistical significance is only marginal probably because of small sample problems. Overall, our evidence provides support for both fundamental and behavioral explanations for skewness and coskewness and their changes in Latin America but stops short of being able to disentangle them.

Suggested Citation

Adler, Michael and Qi, Rong, Changes of Skewness and Coskewness in Latin American Stock Returns: Behavioral vs. Fundamental Factors (January 16, 2012). Available at SSRN: https://ssrn.com/abstract=1986290 or http://dx.doi.org/10.2139/ssrn.1986290

Michael Adler (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Rong Qi

ING Aeltus Asset Management ( email )

10 State House Square
Hartford, CT 06457
United States

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