Skewness, Individual investor preference, and the Cross-Section of Stock Returns

Review of Finance, Forthcoming

63 Pages Posted: 21 Oct 2015 Last revised: 13 Mar 2017

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xin Liu

Hanqing Advanced Institute of Economics and Finance, Renmin University of China

Date Written: February 21, 2017

Abstract

We find a robust negative relation between skewness/lotter-like features, proxied by maximum return (MAX) over the last month, and future returns for stocks preferred by individual investors. This negative relation is nonexistent for the rest of stocks. We identify stocks preferred by individual investors through bundling 10 stock characteristics associated with their stock preferences. The negative relation between MAX and future return is produced by the stocks preferred by individuals that account for less than 5% of the overall market capitalization. Our results are robust to alternative definitions of MAX and lotter-like features such as total, idiosyncratic, and expected skewness.

Keywords: MAX, lottery-like features, skewness, individual investor preference index, cross-sectional return predictability

JEL Classification: D03, G11, G12, G17

Suggested Citation

Lin, Tse-Chun and Liu, Xin, Skewness, Individual investor preference, and the Cross-Section of Stock Returns (February 21, 2017). Review of Finance, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2676633 or http://dx.doi.org/10.2139/ssrn.2676633

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xin Liu

Hanqing Advanced Institute of Economics and Finance, Renmin University of China ( email )

Room 307A
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

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