Idiosyncratic skewness and cross-section of stock returns: Evidence from Taiwan

Mei-Chen Lin and Yu-Ling Lin

International Review of Financial Analysis, 2021, vol. 77, issue C

Abstract: In this study, we examine whether idiosyncratic skewness (IS) affects the returns of the Taiwan stock market. We find that speculative retail investors prefer positive skewness in stocks that leads them to overprice these stocks. As a result, the IS, that reflects gambling, has a negative relation with future returns. Gambling preferences vary with time, mainly occur during recessions and down markets. Moreover, the negative IS-return relation exists only among firms with prior capital gains. We use a difference-in-difference (DID) framework to mitigate the endogeneity concern and find that this IS effect is more significant among stocks with lower arbitrage limits. The IS effect remains significant even after controlling for the IS risk factor. Overall, the IS effect cannot be explained by either arbitrage limits or risk exposure.

Keywords: Idiosyncratic skewness; Stock returns; Arbitrage limits; Risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:77:y:2021:i:c:s1057521921001514

DOI: 10.1016/j.irfa.2021.101816

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