Conditional Skewness of Aggregate Market Returns Report as inadecuate

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The skewness of the conditional return distribution plays a significant role infinancial theory and practice. This paper examines whether conditional skewness ofdaily aggregate market returns is predictable and investigates the economicmechanisms underlying this predictability. In both developed and emerging markets,there is strong evidence that lagged returns predict skewness; returns are morenegatively skewed following an increase in stock prices and returns are morepositively skewed following a decrease in stock prices. The empirical evidence showsthat the traditional explanations such as the leverage effect, the volatility feedbackeffect, the stock bubble model (Blanchard and Watson, 1982), and the fluctuatinguncertainty theory (Veronesi, 1999) are not driving the predictability of conditionalskewness at the market level. The relation between skewness and lagged returns ismore consistent with the Cao, Coval, and Hirshleifer (2002) model. Our findingshave implications for future theoretical and empirical models of time-varying marketreturn distributions, optimal asset allocation, and risk management.

Keywords: Conditional skewness ; Conditional Volatility ; Predicting Skewness ; Aggregatemarket returns ; International finance

Subject(s): Financial Economics


Research Methods/ Statistical Methods

Issue Date: Jun 16 2009

Publication Type: Working or Discussion Paper

PURL Identifier:

Total Pages: 34

JEL Codes: G12; C1

Series Statement: Working Paper

WP 2009-22

Record appears in: Cornell University > Department of Applied Economics and Management > Working Papers

Author: Charoenrook, Anchada ; Daouk, Hazem


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