How Should We Interpret Evidence of Time Varying Conditional Skewness?

National U of Singapore Economics Working Paper

28 Pages Posted: 27 May 2002

See all articles by Anthony S. Tay

Anthony S. Tay

Singapore Management University - School of Economics

Gamini Premaratne

University of Brunei Darussalam; University of Illinois at Urbana-Champaign - Department of Economics

Date Written: June 2002

Abstract

Several recent articles report evidence of predictability in the skewness of equity returns, raising hopes that predictability in third moments will be useful for forecasting the probability of tail events. The evidence is unfortunately difficult to interpret, partly because they were obtained mainly from parametric models of time-varying conditional skewness, and because little is known about the behavior of such models, for instance, when there are outliers. We investigate a non-parametric approach to testing for predictability in skewness. Specifically, we explore the size and power of a Runs tests, and compare this approach with other tests. A re-examination of daily market returns reveals mild evidence of predictability in skewness. Incorporating this conditional heteroskewness into standard volatility models hardly improves out-of-sample forecasts of tail probabilities.

Keywords: Conditional skewness, Runs test, ARCD model, Hansen t, heteroskewness, heterokurtosis, third moments, time-varying higher moments

JEL Classification: C5, C12

Suggested Citation

Tay, Anthony S. and Premaratne, Gamini, How Should We Interpret Evidence of Time Varying Conditional Skewness? (June 2002). National U of Singapore Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=311479 or http://dx.doi.org/10.2139/ssrn.311479

Anthony S. Tay (Contact Author)

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore

Gamini Premaratne

University of Brunei Darussalam ( email )

Jalan Tungku Link
Gadong, BE1410
Brunei

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

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