Skewness Preference and Market Anomalies

72 Pages Posted: 6 May 2018 Last revised: 26 Nov 2019

See all articles by Alok Kumar

Alok Kumar

University of Miami - Miami Herbert Business School

Mehrshad Motahari

University of Cambridge - Judge Business School

Richard Taffler

University of Warwick - Finance Group

Date Written: November 25, 2019

Abstract

This study shows that investor preference for positively skewed payoffs is a common driver of mispricing across a wide range of market anomalies. Specifically, skewness-loving investors overweight overpriced stocks in their portfolios and in doing so contribute to the anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we find that stocks with higher skewness are significantly more mispriced than are those with lower skewness. A factor that captures skewness-related mispricing significantly improves the performance of conventional asset pricing models in explaining the abnormal returns of anomaly strategies.

Keywords: Anomalies, commonality, skewness preference, mispricing, trading strategies.

JEL Classification: G02, G12, G14

Suggested Citation

Kumar, Alok and Motahari, Mehrshad and Taffler, Richard, Skewness Preference and Market Anomalies (November 25, 2019). 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 )

514 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)

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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