Why Does Skewness Matter? Ask Kurtosis.

39 Pages Posted: 22 Aug 2019

See all articles by Roberto Stein

Roberto Stein

University of Nebraska at Lincoln - Department of Finance

Date Written: August 20, 2019


I investigate the relationship between measures of skewness and expected stock returns. Forcing the data to fit a linear model, past research finds only a negative relationship between these variables. Using a novel methodology that endogenously estimates breakpoints in the relationship between two variables, I find three distinct zone. Expected returns are decreasing in skewness, but only for a region of relatively low absolute values of skewness. For distributions which are highly left- or right-skewed, the relationship is actually positive. Moreover, I find that kurtosis plays a major role in mediating this relationship. Adding measures of the fourth moment to all models tested turns all skewness coefficients negative, and most statistically insignificant. Relying on probability theory, I provide a theoretical framework that supports all empirical findings.

Keywords: skewness, kurtosis, idiosyncratic moments, asset pricing

JEL Classification: G11, G12, G17

Suggested Citation

Stein, Roberto, Why Does Skewness Matter? Ask Kurtosis. (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3440159 or http://dx.doi.org/10.2139/ssrn.3440159

Roberto Stein (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

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