Do Stock Markets Really Care About Skewness?

72 Pages Posted: 11 Sep 2014 Last revised: 31 Jan 2019

See all articles by Kevin Aretz

Kevin Aretz

Alliance Manchester Business School

Yakup Eser Arısoy

NEOMA Business School

Date Written: January 30, 2019

Abstract

Recent empirical studies show that statistical forecasts of a stock's return skewness negatively price stocks, apparently consistent with recent theoretical studies. While the theoretical studies, however, focus on skewness over long return horizons, the empirical studies focus on skewness over much shorter horizons. Using new estimators of realized skewness, we document that this inconsistency has important consequences for the inferences that we are able to draw from the empirical studies. Specifically, we first report that established skewness forecasts are much better in predicting short- than long-horizon skewness. More importantly, we next show that, while up to 80% of the pricing power of the forecasts comes from them predicting short-horizon skewness, only about 20% comes from them predicting long-horizon skewness. Taken together, our results suggest that the extant evidence should be interpreted as implying that short-horizon, but not necessarily long-horizon, skewness is priced in stocks.

Keywords: Asset pricing; physical skewness; realized skewness; quantile regression models

JEL Classification: G11, G12, G15

Suggested Citation

Aretz, Kevin and Arısoy, Yakup Eser, Do Stock Markets Really Care About Skewness? (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=2494291 or http://dx.doi.org/10.2139/ssrn.2494291

Kevin Aretz (Contact Author)

Alliance Manchester Business School ( email )

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HOME PAGE: http://www.kevin-aretz.com

Yakup Eser Arısoy

NEOMA Business School ( email )

59 rue Pierre Taittinger
Reims, 51100
France

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