Cross-Sectional Skewness

49 Pages Posted: 1 Oct 2018

See all articles by Simon Oh

Simon Oh

University of Chicago

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: September 2018

Abstract

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. However, skewness in long-run returns substantially understates what the lognormal model would predict. Nonstationary share dynamics imply a breakdown in the distinction between market and idiosyncratic risk in the lognormal model. We present an alternative model that matches the skewness in the data and implies stationary wealth shares. In this model, idiosyncratic risk is the primary driver of growth in the economy.

Suggested Citation

Oh, Simon and Wachter, Jessica A., Cross-Sectional Skewness (September 2018). NBER Working Paper No. w25113, Available at SSRN: https://ssrn.com/abstract=3258251

Simon Oh (Contact Author)

University of Chicago

1101 East 58th Street
Chicago, IL 60637
United States

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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