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Conditional Skewness of Aggregate Market Returns

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  • Charoenrook, Anchada
  • Daouk, Hazem

Abstract

The skewness of the conditional return distribution plays a significant role in financial theory and practice. This paper examines whether conditional skewness of daily aggregate market returns is predictable and investigates the economic mechanisms underlying this predictability. In both developed and emerging markets, there is strong evidence that lagged returns predict skewness; returns are more negatively skewed following an increase in stock prices and returns are more positively skewed following a decrease in stock prices. The empirical evidence shows that the traditional explanations such as the leverage effect, the volatility feedback effect, the stock bubble model (Blanchard and Watson, 1982), and the fluctuating uncertainty theory (Veronesi, 1999) are not driving the predictability of conditional skewness at the market level. The relation between skewness and lagged returns is more consistent with the Cao, Coval, and Hirshleifer (2002) model. Our findings have implications for future theoretical and empirical models of time-varying market return distributions, optimal asset allocation, and risk management.

Suggested Citation

  • Charoenrook, Anchada & Daouk, Hazem, 2009. "Conditional Skewness of Aggregate Market Returns," Working Papers 51181, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:51181
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    File URL: http://purl.umn.edu/51181
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    References listed on IDEAS

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    1. Gary Fields & Ravi Kanbur, 2007. "Minimum wages and poverty with income-sharing," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 5(2), pages 135-147, August.
    2. Neumark, David & Wascher, William L., 2007. "Minimum Wages and Employment," Foundations and Trends(R) in Microeconomics, now publishers, vol. 3(1–2), pages 1-182, March.
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    Keywords

    Conditional skewness; Conditional Volatility; Predicting Skewness; Aggregate market returns; International finance; Financial Economics; Marketing; Research Methods/ Statistical Methods; G12; C1;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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