Systematic Skewness and Stock Returns

Abstract

This paper shows that the systematic skewness premium in individual stocks is positive on average, exposed to systematic skewness, and time varying. When skewness preference is high rather than low, the premium is 4% higher. Systematic skewness also has significant marginal explanatory power for returns relative to most characteristics except size and momentum. The corresponding premia and factors, however, do not improve the investment opportunity set of skewness investors. These results suggest that skewness preference is an important determinant of expected returns and provide a possible rationale for size and momentum in cross-sectional regressions and factor models.

Keywords: asset pricing, systematic skewness, residual co-skewness, skewness preference, market capitalization, momentum

JEL Classification: G11, G12