Forecasting stock return: The role of idiosyncratic asymmetry risk

This paper introduces a novel methodology for quantifying return asymmetry. Our investigation yields two principal findings. First, through nonparametric testing, we establish that our proposed measure demonstrates enhanced testing efficiency relative to conventional third-order skewness. Second, our analysis reveals that the proposed asymmetry metric serves as a robust predictor of cross-sectional equity returns. Consistent with theoretical predictions in the extant literature, we document a negative relationship between return asymmetry and subsequent stock performance. Our empirical evidence suggests that the cross-sectional pricing power of the asymmetric measure can be partially attributed to mispricing and arbitrage constraints. Moreover, we find that the asymmetric risk premium in the Chinese stock market is approximately twice the magnitude observed in the U.S. market.