Variance Spillover and Skewness in Financial Asset Returns

Posted: 10 Nov 2005

See all articles by Bob Korkie

Bob Korkie

University of Alberta

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Ranjini Jha

University of Waterloo - School of Accounting and Finance

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Abstract

Bond and stock returns have been observed in the literature to exhibit unconditional skewness and temporal persistence in conditional skewness. We demonstrate that observed persistence in conditional third central moments can be due to the spillover of conditional variance dynamics. The confounding of true skewness and a variance spillover effect is problematic for financial modeling. Using market data, we empirically demonstrate that a simple standardization approach removes the variance-induced skewness persistence. An important implication is that more parsimonious return and asset pricing models result if skewness persistence need not be modeled.

Keywords: Financial asset returns, conditional moments, skewness persistence, variance persistence, variance spillover

JEL Classification: G12, C13

Suggested Citation

Korkie, Robert (Bob) and Turtle, Harry J. and Jha, Ranjini, Variance Spillover and Skewness in Financial Asset Returns. Financial Review, Vol. 41, No. 1, February 2006. Available at SSRN: https://ssrn.com/abstract=840169

Robert (Bob) Korkie

University of Alberta ( email )

Edmonton, Alberta
Canada
(780) 982-1141 (Phone)

HOME PAGE: http://www.bus.ualberta.ca/bkorkie/

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Ranjini Jha (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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