Do Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns?
AbstractYes. We use intraday data to compute weekly realized variance, skewness and kurtosis for individual equities and assess whether this week?s realized moments predict next week?s stock returns in the cross-section. We sort stocks each week according to their past realized moments, form decile portfolios and analyze subsequent weekly returns. We ?nd a very strong negative relationship between realized skewness and next week?s stock returns, and a positive relationship between realized kurtosis and next week?s stock returns. We do not ?nd a strong relationship between realized volatility and stock returns. A trading strategy that buys stocks in the lowest realized skewness decile and sells stocks in the highest realized skewness decile generates an average weekly return of 43 basis points with a t-statistic of 8:91. A similar strategy that buys stocks with high realized kurtosis and sells stocks with low realized kurtosis produces a weekly return of 16 basis points with a t-statistic of 2:98. Our results are robust across sample periods, portfolio weightings, and proxies for ?rm characteristics, and they are not captured by the Fama-French and Carhart factors.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2011-44.
Date of creation: 29 Jul 2011
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Web page: http://www.econ.au.dk/afn/
Realized volatility; skewness; kurtosis; equity markets; return prediction.;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-CFN-2011-12-19 (Corporate Finance)
- NEP-FOR-2011-12-19 (Forecasting)
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