More than meets the eye: On the relationship between skewness and expected returns

Roberto Stein

Finance Research Letters, 2024, vol. 60, issue C

Abstract: I investigate the relationship between skewness and expected stock returns. I find that this relationship is not lineal, as previously established, and its sign varies. Applying a methodology that estimates breakpoints in the relationship between variables results in two breakpoints, delimiting three zones. Returns are decreasing in skewness, but only for mid-skewness stocks. For low- and high-skewness stocks, the relationship is positive. An explanation of these findings is that investors who seek stocks with lottery-like characteristics such as high skewness generate the observed negative relationship in the mid-skewness zone, whereas more rational investors prevail in the other zones.

Keywords: Skewness; Expected returns; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012485

DOI: 10.1016/j.frl.2023.104876

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