Modeling Conditional Skewness in Stock Returns

Markku Lanne and Pentti Saikkonen

No ECO2005/14, Economics Working Papers from European University Institute

Abstract: In this paper we propose a new GARCH-in-Mean (GARCH-M) model allowing for conditional skewness. The model is based on the so-called z distribution capable of modeling moderate skewness and kurtosis typically encountered in stock return series. The need to allow for skewness can also be readily tested. Our empirical results indicate the presence of conditional skewness in the postwar U.S. stock returns. Small positive news is also found to have a smaller impact on conditional variance than no news at all. Moreover, the symmetric GARCH-M model not allowing for conditional skewness is found to systematically overpredict conditional variance and average excess returns.

Keywords: Conditional skewness; GARCH-in-Mean; Risk-return tradeoff (search for similar items in EconPapers)
JEL-codes: C16 C22 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-ets, nep-fin, nep-fmk and nep-rmg
Date: 2005
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Related works:
Journal Article: Modeling Conditional Skewness in Stock Returns (2007)
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