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Measuring skewness premia

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  • Langlois, Hugues

Abstract

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.

Suggested Citation

  • Langlois, Hugues, 2020. "Measuring skewness premia," Journal of Financial Economics, Elsevier, vol. 135(2), pages 399-424.
    • Handle: RePEc:eee:jfinec:v:135:y:2020:i:2:p:399-424
    DOI: 10.1016/j.jfineco.2019.06.002
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    3. Chenglu Jin & Thomas Conlon & John Cotter, 2023. "Co-Skewness across Return Horizons," Journal of Financial Econometrics, Oxford University Press, vol. 21(5), pages 1483-1518.
    4. Dai, Xingyu & Xiao, Ling & Wang, Qunwei & Dhesi, Gurjeet, 2021. "Multiscale interplay of higher-order moments between the carbon and energy markets during Phase III of the EU ETS," Energy Policy, Elsevier, vol. 156(C).
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    7. Cui, Xiangyu & Guan, Zheng, 2022. "On the pricing of expected idiosyncratic skewness," Economics Letters, Elsevier, vol. 216(C).
    8. Zhen, Fang & Chen, Jingnan, 2022. "A closed-form mean–variance–skewness portfolio strategy," Finance Research Letters, Elsevier, vol. 47(PB).
    9. Khashanah, Khaldoun & Simaan, Majeed & Simaan, Yusif, 2022. "Do we need higher-order comoments to enhance mean-variance portfolios? Evidence from a simplified jump process," International Review of Financial Analysis, Elsevier, vol. 81(C).
    10. Zhen, Fang, 2020. "Asymmetric signals and skewness," Economic Modelling, Elsevier, vol. 90(C), pages 32-42.
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    12. Bollerslev, Tim & Patton, Andrew J. & Quaedvlieg, Rogier, 2022. "Realized semibetas: Disentangling “good” and “bad” downside risks," Journal of Financial Economics, Elsevier, vol. 144(1), pages 227-246.

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    More about this item

    Keywords

    Systematic skewness; Coskewness; Idiosyncratic skewness; Large panel regression; Forecasting;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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