35 Pages Posted: 5 Dec 2017 Last revised: 20 Jun 2019
Date Written: June 18, 2019
This paper evaluates skewness in the cross-section of stock returns in light of predictions from a well-known class of models. Cross-sectional skewness in monthly returns far exceeds what the standard lognormal model of returns would predict. In spite of the fact that cross-sectional skewness is positive, aggregate market skewness is negative. We present a model that accounts for both of these facts. This model also exhibits long-horizon skewness through the mechanism of nonstationary firm shares.
Keywords: long-term returns, idiosyncratic risk, power laws, invariance
JEL Classification: G11, G12
Suggested Citation: Suggested Citation