Asymmetric signals and skewness

This paper develops a model for analyzing skewness in returns when an investor observes a novel skew-normally distributed signal about a risky asset's payoff. The equilibrium third moment increases with the signal's skewness, and its magnitude increases with the signal's noisiness. Using institutional ownership and market capitalization as proxies for information precision, we find that both proxies are significantly and negatively correlated with the future absolute third moment in firm returns in China. We show that these relations are mainly driven by the negative third moment. The two proxies are positively correlated with future skewness, which contradicts the corresponding relations found in the US. Our model can reconcile the opposite findings if the US evidence is driven by positive skewness. This paper suggests that it is more appropriate to forecast positive and negative skewness separately when using information-precision proxies.