Measuring Stock Return Asymmetry Beyond Conventional Skewness

Summary

The report summarizes research on whether the asymmetry of stock returns predicts expected returns, a relationship for which prior findings have conflicted. It presents two distribution-based measures beyond conventional skewness: the difference between the probabilities of upside and downside returns, and the absolute value of that difference.

The cited empirical work finds that greater upside asymmetry is associated with lower future returns. The report says these measures identify asymmetry in a larger share of individual stocks than a skewness test, and that the result persists after controlling for tail risk, extreme returns, financial distress, volatility, investor sentiment, and market liquidity. Conventional skewness has a less stable relationship with returns. The evidence is based on historical data and overseas markets; the report suggests testing similar measures in domestic intraday data but does not present such a test or establish that the result will generalize.

Key ideas

• The report addresses conflicting evidence about skewness and expected stock returns.
• It proposes two asymmetry measures based on upside and downside return probabilities.
• Higher upside asymmetry is associated with lower future stock returns in the cited research.
• The reported relationship remains after controls for several risk and market variables.
• The evidence is historical and based on overseas markets, so its transferability is uncertain.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.