Individual Investors, Average Skewness, and Market Returns

Jungmu Kim and Yuen Jung Park
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Jungmu Kim: Department of Business Administration, Yeungnam University, Gyeongsan 38541, Korea
Yuen Jung Park: Department of Finance, College of Business, Hallym University, Chuncheon 24252, Korea

Sustainability, 2020, vol. 12, issue 20, 1-14

Abstract: Understanding individual investors’ short-term behavior toward skewness is essential for the management and investment of corporate social responsibility because the skewness-seeking behavior of individual investors, which causes a bubble in the market, makes the market as a whole more vulnerable, and it is difficult for the market to be sustainable. In the Korean stock market, we investigated whether average skewness can predict future market returns at the market level and whether the mispricing is associated with demand for the skewness of individual noise traders. Measuring the demand for skewness by the proportion of trading money of individual investors, we found that average skewness negatively predicts future market excess return when the demand for skewness is strong. The result is robust to controlling for market variance as well as other predictors. Our finding indicates that the overall market is overpriced when individual investors excessively trade to seek huge returns in spite of a small probability.

Keywords: individual investors; Korean stock market; lottery-type stock; skewness; sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
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