Expected Skewness and Momentum
40 Pages Posted: 29 Apr 2015 Last revised: 3 Aug 2016
Date Written: August 2016
Motivated by the time-series insights of Daniel and Moskowitz (2016), we investigate the link between expected skewness and momentum in the cross-section. The alpha of skewness-enhanced (-weakened) momentum is about twice (half) as large as the traditional alpha. These findings are driven by the short leg. Portfolio sorts, Fama-MacBeth regressions, and the market reaction to earnings announcements suggest that expected skewness is an important determinant of momentum. Due to the simplicity of the approach, its economic magnitude, its existence among large stocks, and the success of risk management, the results are difficult to reconcile with the efficient market hypothesis.
Keywords: Momentum, skewness, market efficiency, return predictability, behavioral finance
JEL Classification: G12, G14
Suggested Citation: Suggested Citation