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Skewness in Stock Returns:Reconciling the Evidence on Firm versus Aggregate Returns


  • Albuquerque, Rui


Aggregate stock market returns display negative skewness. Firm-level stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This paper provides a unified theory that reconciles the two facts. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to negative skewness in aggregate returns. I provide evidence consistent with the model predictions.

Suggested Citation

  • Albuquerque, Rui, 2010. "Skewness in Stock Returns:Reconciling the Evidence on Firm versus Aggregate Returns," CEPR Discussion Papers 7896, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7896

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    References listed on IDEAS

    1. Cohen, Daniel A. & Dey, Aiyesha & Lys, Thomas Z. & Sunder, Shyam V., 2007. "Earnings announcement premia and the limits to arbitrage," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 153-180, July.
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    Cited by:

    1. Marie-Hélène Broihanne & Maxime Merli & Patrick Roger, 2016. "Diversification, gambling and market forces," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 129-157, July.
    2. Do, Hung Xuan & Brooks, Robert & Treepongkaruna, Sirimon & Wu, Eliza, 2014. "How does trading volume affect financial return distributions?," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 190-206.
    3. Schneider, Paul & Wagner, Christian & Zechner, Josef, 2016. "Low risk anomalies?," CFS Working Paper Series 550, Center for Financial Studies (CFS).
    4. repec:eee:jetheo:v:172:y:2017:i:c:p:512-557 is not listed on IDEAS
    5. Chou, Pin-Huang & Chou, Robin K. & Ko, Kuan-Cheng & Chao, Chun-Yi, 2013. "What affects the cool-off duration under price limits?," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 256-278.
    6. Liu, Qingfu & Hua, Renhai & An, Yunbi, 2016. "Determinants and information content of intraday bid-ask spreads: Evidence from Chinese commodity futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 135-148.
    7. Viral V. Acharya & Peter DeMarzo & Ilan Kremer, 2011. "Endogenous Information Flows and the Clustering of Announcements," American Economic Review, American Economic Association, vol. 101(7), pages 2955-2979, December.
    8. Chang, Bo Young & Christoffersen, Peter & Jacobs, Kris, 2013. "Market skewness risk and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(1), pages 46-68.
    9. Aabo, Tom & Pantzalis, Christos & Park, Jung Chul, 2016. "Multinationality as real option facilitator — Illusion or reality?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 1-17.
    10. Bae, Kwangil & Kang, Jangkoo & Lee, Soonhee, 2016. "Bullish/bearish/neutral strategies under short sale restrictions," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 227-239.
    11. Patrick Roger & Marie-Hélène Broihanne & Maxime Merli, 2012. "In search of positive skewness: the case of individual investors," Working Papers of LaRGE Research Center 2012-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    12. Huber, Jürgen & Kirchler, Michael & Stefan, Matthias, 2014. "Experimental evidence on varying uncertainty and skewness in laboratory double-auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 798-809.
    13. Dijk, Oege & Holmen, Martin & Kirchler, Michael, 2014. "Rank matters–The impact of social competition on portfolio choice," European Economic Review, Elsevier, vol. 66(C), pages 97-110.
    14. Kim, Thomas, 2015. "Does individual-stock skewness/coskewness reflect portfolio risk?," Finance Research Letters, Elsevier, vol. 15(C), pages 167-174.
    15. Robert Brooks & Robert Faff & Sirimon Treepongkaruna & Eliza Wu, 2015. "Do Sovereign Re-Ratings Destabilize Equity Markets during Financial Crises? New Evidence from Higher Return Moments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 777-799, June.
    16. repec:eee:ecofin:v:42:y:2017:i:c:p:314-337 is not listed on IDEAS

    More about this item


    announcement events; crosssectional heterogeneity; firm returns; market returns; Skewness;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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


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