Skewness Expectations and Portfolio Choice

Abstract

Many models of investor behavior predict that investors prefer assets that they believe to have positively skewed return distributions. We provide a direct test of this prediction in a representative sample of the Dutch population. Using individual-level data on return expectations for a broad index and a single stock, we show that portfolio allocations increase with the skewness of respondents' return expectations for the respective asset, controlling for other moments of a respondents' expectations and sociodemographic information. We also show that while an individuals' expectations are correlated across assets, sociodemographics only capture very little of the substantial heterogeneity in expectations.

Keywords: stock market expectations, skewness, behavioral finance, portfolio choice

JEL Classification: D14, D84, G02, G11