Measuring skewness premia

We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Using a large number of predictors, we forecast the cross-sectional ranks of systematic and idiosyncratic skewness, which are easier to predict...

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Bibliographic Details
Published in:Journal of financial economics 2020-02, Vol.135 (2), p.399-424
Main Author: Langlois, Hugues
Format: Article
Language:English
Subjects:
Coskewness
Forecasting
Idiosyncratic skewness
Large panel regression
Risk assessment
Risk factors
Securities analysis
Skewness
Systematic skewness
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Description
Summary:We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Using a large number of predictors, we forecast the cross-sectional ranks of systematic and idiosyncratic skewness, which are easier to predict than their actual values. Compared to other measures of ex ante systematic skewness, our forecasts create a significant spread in ex post systematic skewness. A predicted systematic skewness risk factor carries a significant and robust risk premium that ranges from 6% to 12% per year. In contrast, the role of idiosyncratic skewness in pricing stocks is less robust.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2019.06.002