Higher Realized Moments and Stock Return Predictability

Rehman, S., Sharif, S., & Ullah, W. (2021). Higher Realized Moments and Stock Return Predictability, Romanian Journal of Economic Forecasting. Volume 24, Issue 1.

37 Pages Posted: 12 Apr 2021

See all articles by Seema Rehman

Seema Rehman

Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST) - Department of Management Sciences

Saqib Sharif

Institute of Business Administration, Karachi

Wali Ullah

Institute of Business Administration (IBA); University of Karachi - Institute of Business Administration (IBA), Karachi

Date Written: March 9, 2019

Abstract

This study exploits information contained in high frequency sample data by computing higher realized moments of individual firms in the emerging stock market of Pakistan. Furthermore, the relation of higher moments with future stock returns is examined by constructing decile portfolios based on weekly realized volatility, skewness and kurtosis to predict next week return of the trading strategy that takes long position for portfolio of stocks having high realized moment and takes short position for portfolio of stocks having low realized moment. The long short spread is significant for equal weighted weekly returns based on realized volatility. The long short weekly return is positive and highly significant for realized skewness, 1.659 and 1.969 (in bps) with t-statistics of 7.92 and 14.027 for value and equal weighted portfolios respectively. The result for realized skewness is also supported by Carhart’s Alphas. Similar results are obtained for realized kurtosis, 0.427 and 0.664 (in bps) of long short return, with t-statistics of 2.079 and 4.049 for value and equal weighted portfolios respectively. The evidence suggests that realized skewness and kurtosis can predict the next week’s moment based cross sectional stock returns.

Keywords: Cross-section of equity returns, Emerging Market, Intraday data, Realized Kurtosis, Realized Skewness

JEL Classification: G11, G12, G17, O16

Suggested Citation

Rehman, Seema and Sharif, Saqib and Ullah, Wali and Ullah, Wali, Higher Realized Moments and Stock Return Predictability (March 9, 2019). Rehman, S., Sharif, S., & Ullah, W. (2021). Higher Realized Moments and Stock Return Predictability, Romanian Journal of Economic Forecasting. Volume 24, Issue 1., Available at SSRN: https://ssrn.com/abstract=3702835

Seema Rehman (Contact Author)

Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST) - Department of Management Sciences ( email )

90, Clifton
Karachi, 75600
Pakistan

Saqib Sharif

Institute of Business Administration, Karachi ( email )

IBA Main Campus,
University Road,
Karachi, Sindh 75270
Pakistan
+922138104700 (Phone)

Wali Ullah

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Institute of Business Administration (IBA) ( email )

Karachi, Pakistan
Karachi, Sindh
Pakistan
+923339476947 (Phone)

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