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More than meets the eye: On the relationship between skewness and expected returns

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  • Stein, Roberto

Abstract

I investigate the relationship between skewness and expected stock returns. I find that this relationship is not lineal, as previously established, and its sign varies. Applying a methodology that estimates breakpoints in the relationship between variables results in two breakpoints, delimiting three zones. Returns are decreasing in skewness, but only for mid-skewness stocks. For low- and high-skewness stocks, the relationship is positive. An explanation of these findings is that investors who seek stocks with lottery-like characteristics such as high skewness generate the observed negative relationship in the mid-skewness zone, whereas more rational investors prevail in the other zones.

Suggested Citation

  • Stein, Roberto, 2024. "More than meets the eye: On the relationship between skewness and expected returns," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012485
    DOI: 10.1016/j.frl.2023.104876
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    More about this item

    Keywords

    Skewness; Expected returns; Asset pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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