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Cross-sectional Skewness

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  • Simon Oh
  • Jessica A. Wachter

Abstract

This paper evaluates skewness in the cross-section of stock returns in light of predictions from a well-known class of models. Cross-sectional skewness in monthly returns far exceeds what the standard lognormal model of returns would predict. However, skewness in long-run returns substantially understates what the lognormal model would predict. Nonstationary share dynamics imply a breakdown in the distinction between market and idiosyncratic risk in the lognormal model. We present an alternative model that matches the skewness in the data and implies stationary wealth shares. In this model, idiosyncratic risk is the primary driver of growth in the economy.

Suggested Citation

  • Simon Oh & Jessica A. Wachter, 2018. "Cross-sectional Skewness," NBER Working Papers 25113, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25113
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    JEL classification:

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

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