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On the predictive ability of conditional market skewness

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  • Serna, Gregorio

Abstract

This study analyzes the capacity of conditional market skewness to predict future market returns over a recent period of time, which contains the last two major market crises: the financial crisis of 2008 and the COVID-19 pandemic in 2020. The results show that conditional market skewness performs well in terms of predicting future S&P 500, Nasdaq Composite and EUR/USD returns, even after controlling for business cycle fluctuations. However, contrary to what is expected, it is found that during this period containing two major financial crises, the relationship between conditional market asymmetry and future returns is positive. The rationale behind this finding is that during periods with major crises, when large drops in asset prices that sharply reduce market asymmetry occur, many investors find prices attractive, increasing buying pressure and thus reducing market returns in the next period.

Suggested Citation

  • Serna, Gregorio, 2023. "On the predictive ability of conditional market skewness," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 186-191.
    • Handle: RePEc:eee:quaeco:v:91:y:2023:i:c:p:186-191
    DOI: 10.1016/j.qref.2022.11.001
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    More about this item

    Keywords

    Market return predictions; Conditional skewness; Sample skewness; Conditional variance; Sample variance;
    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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