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
Date Written: February 21, 2017
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: Suggested Citation