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

Abstract

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

Goulding, Christian L., Pricing Implications of Clearing a Skewed Asset from the Market (September 13, 2018). Available at SSRN: https://ssrn.com/abstract=2893831 or http://dx.doi.org/10.2139/ssrn.2893831

Christian L. Goulding (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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