Skewness Preference and Market Anomalies

77 Pages Posted: 6 May 2018 Last revised: 19 Jul 2022

See all articles by Alok Kumar

Alok Kumar

University of Miami - Miami Herbert Business School

Mehrshad Motahari

Bayes Business School (formerly Cass); University of Cambridge - Judge Business School

Richard Taffler

University of Warwick - Finance Group

Date Written: July 18, 2022

Abstract

This study demonstrate that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among fi rms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high skewness firms in Short anomaly portfolios. Skewness does not affect the performance of Long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preference assign relatively larger weights to stocks in Short anomaly portfolios.

Keywords: Market anomalies, skewness preference, mispricing, idiosyncratic skewness, investor sentiment.

JEL Classification: G12, G14

Suggested Citation

Kumar, Alok and Motahari, Mehrshad and Taffler, Richard, Skewness Preference and Market Anomalies (July 18, 2022). University of Miami Business School Research Paper No. 3166638, Available at SSRN: https://ssrn.com/abstract=3166638 or http://dx.doi.org/10.2139/ssrn.3166638

Alok Kumar

University of Miami - Miami Herbert Business School ( email )

512B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Mehrshad Motahari (Contact Author)

Bayes Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Richard Taffler

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
+442476524153 (Phone)
+442476523779 (Fax)

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