Importance of Skewness in Decision Making: Evidence from the Indian Stock Exchange

Paresh Narayan () and Huson Ali Ahmed ()

Working Papers from Deakin University, Department of Economics

Abstract: In this paper our goal is to examine the importance of skewness in decision making, in particular on investor utility. We use time-series daily data on sectoral stock returns on the Indian stock exchange. We test for sectoral stock return predictability using commonly used financial ratios, namely, the book-to-market, dividend yield and price-earnings ratio. We find strong evidence of predictability. Using this evidence of predictability, we forecast sectoral stock returns for each of the sectors in our sample, allowing us to devise trading strategies that account for skewness of returns. We discover evidence that accounting for skewness leads not only to higher utility compared to a model that ignores skewness, but utility is sector-dependent.

Keywords: Returns; Skewness; Predictability; Utility; Investor. (search for similar items in EconPapers)
Date: 2014-07-07
New Economics Papers: this item is included in nep-for and nep-upt
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Citations: View citations in EconPapers (13)

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http://www.dx.doi.org/10.1016/j.gfj.2014.10.006

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Journal Article: Importance of skewness in decision making: Evidence from the Indian stock exchange (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:dkn:ecomet:fe_2014_11

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