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The relationships between unsystematic risk, skewness and stock returns during up and down markets

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  • Tang, Gordon Y. N.
  • Shum, Wai Cheong
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    Abstract

    A recent article published in International Business Review (12 (2003) 109) argues for the usefulness of beta as a measure of risk in international stock markets. The beta-return relationship is significantly positive (negative) when the market excess returns are positive (negative). This paper extends their study further by examining other statistical risk measures. It is well known that stock returns are non-normally distributed with significant skewness and kurtosis. Under the same conditional framework, investors are found not only compensated for bearing beta risk, but also for bearing unsystematic risk, providing evidence that international investors do not hold well-diversified portfolios. Skewness, but not kurtosis, plays a significant role in pricing international stock returns. Investors accept less positive returns for positively skewed portfolios. Total risk is significantly and positively (negatively) related to realized weekly returns during up (down) markets. Our results support previous findings and add that other statistical risk measures are also useful in explaining the cross-sectional variations in international stock returns, and hence, are relevant to portfolio managers.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Business Review.

    Volume (Year): 12 (2003)
    Issue (Month): 5 (October)
    Pages: 523-541

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    Handle: RePEc:eee:iburev:v:12:y:2003:i:5:p:523-541

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    Related research

    Keywords: Risk-return Conditional CAPM Beta Skewness International markets;

    References

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    Cited by:
    1. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
    2. Yu, Jing-Rung & Lee, Wen-Yi, 2011. "Portfolio rebalancing model using multiple criteria," European Journal of Operational Research, Elsevier, vol. 209(2), pages 166-175, March.
    3. Guermat, Cherif & Freeman, Mark C., 2010. "A net beta test of asset pricing models," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 1-9, January.
    4. Nandha, Mohan & Hammoudeh, Shawkat, 2007. "Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets," Research in International Business and Finance, Elsevier, vol. 21(2), pages 326-341, June.
    5. PaweĊ‚ Wnuk Lipinski, 2013. "Portfolio selection models based on characteristics of return distributions," Working Papers 2013-14, Faculty of Economic Sciences, University of Warsaw.

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