Skewness Preference Across Countries
Business and Economic Horizons, 2015, 11(2), 115-130.
16 Pages Posted: 15 May 2015 Last revised: 26 Dec 2015
Date Written: May 14, 2015
Prospect theory implies that assets with positively skewed returns should be traded at premium to assets with negative skewness. We hypothesize that in the integrated financial markets this concept should also hold for the entire country equity portfolios. This article examines the linkages between the country-level expected returns and past skewness. We evidence a robust negative relationship between skewness and future returns. The phenomenon is most significant within large, liquid, developed, and open stock markets. Additional sorts on skewness can improve performance of both cross-country value and momentum strategies. The study is based on the sorting and cross-sectional tests conducted within a sample of 78 country equity markets for years 1999-2014.
Keywords: skewness preference, country-level effects, inter-market effects, asset pricing, international markets, prospect theory
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation