Do Realized Skewness and Kurtosis Predict the Cross-Section of Equity Returns?

Diego Amaya (), Peter Christoffersen, Kris Jacobs () and Aurelio Vasquez ()
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Diego Amaya: HEC Montreal - Department of Management Sciences, Postal: Montreal, Quebec H3T 2A7, Canada
Kris Jacobs: University of Houston - C.T. Bauer College of Business, Postal: Houston, TX 77204-6021, United States
Aurelio Vasquez: Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration, Postal: Rio Hondo No. 1, Col. Tizapan-San Angel 01000, Mexico

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Yes. We use intraday data to compute weekly realized variance, skewness and kurtosis for individual equities and assess whether this week?s realized moments predict next week?s stock returns in the cross-section. We sort stocks each week according to their past realized moments, form decile portfolios and analyze subsequent weekly returns. We ?nd a very strong negative relationship between realized skewness and next week?s stock returns, and a positive relationship between realized kurtosis and next week?s stock returns. We do not ?nd a strong relationship between realized volatility and stock returns. A trading strategy that buys stocks in the lowest realized skewness decile and sells stocks in the highest realized skewness decile generates an average weekly return of 43 basis points with a t-statistic of 8:91. A similar strategy that buys stocks with high realized kurtosis and sells stocks with low realized kurtosis produces a weekly return of 16 basis points with a t-statistic of 2:98. Our results are robust across sample periods, portfolio weightings, and proxies for ?rm characteristics, and they are not captured by the Fama-French and Carhart factors.

Keywords: Realized volatility; skewness; kurtosis; equity markets; return prediction. (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Pages: 44
Date: 2011-07-29
New Economics Papers: this item is included in nep-cfn and nep-for
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