Price Convexity and Skewness

Jianguo Xu

Journal of Finance, 2007, vol. 62, issue 5, 2521-2552

Abstract: This paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal. The model implies that the equilibrium price is a convex function of the public signal. The model predicts that (1) the stock price reacts more to good news than to bad news; (2) the skewness of stock returns is positively correlated with contemporaneous returns, but negatively correlated with lagged returns; (3) short sale constraints increase rather than decrease skewness; and (4) disagreement about information precision increases skewness. Empirical tests conducted find supportive evidence for all these predictions.

Date: 2007
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https://doi.org/10.1111/j.1540-6261.2007.01283.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:62:y:2007:i:5:p:2521-2552

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