Pricing Implications of Clearing a Skewed Asset from the Market
87 Pages Posted: 6 Jan 2017 Last revised: 23 Sep 2018
Date Written: September 13, 2018
I present a new model of how ex-ante skewness affects expected asset prices. The price that supports a given short position in a positively- (negatively-) skewed asset is further from (closer to) expected value than is the price that supports a long position of the same magnitude, even in a frictionless market. The average effect of this result, under market clearing of stochastic demand, produces the “skewness effect”---a documented negative relationship between ex-ante skewness and expected returns. The theory generates several new predictions about the cross section of expected stock returns, for which I provide empirical support.
Keywords: Ex-Ante Skewness, Rational Expectations, Microstructure Influences in Asset Pricing
JEL Classification: G12, D53, D82
Suggested Citation: Suggested Citation