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Skewness in Individual Stock Returns Versus Index Returns

Article Quant Q&A · Author: develarist
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Summary

The document contrasts return skewness at the market-index level with skewness across individual stocks. It reports that aggregate stock returns are generally considered negatively skewed, while research on individual stocks finds positive average skewness that changes over time.

The answer points to two academic studies, including one that reports separate findings for large, liquid stocks. It does not provide their data, methods, estimates, or detailed results, so it offers limited evidence for deciding whether positive skewness should be used as a prior for a particular stock or portfolio. The central lesson is that skewness depends on the level of aggregation and may vary over time; the cited findings alone do not establish a universal modeling assumption.

Key ideas

  • Aggregate stock index returns are generally described as negatively skewed.
  • Studies cited in the document find positive average skewness for individual stock returns.
  • Individual stock skewness varies over time.
  • One cited study reports separate findings for large, liquid stocks.

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Full text
# Do stock returns show positive skewness?


# Do stock returns show positive skewness?












Do highly liquid (blue chip) stocks exhibit positive skewness more than negative skewness? If so, would positive, rather than negative, skewness be an appropriate and intuitive prior when modeling return distributions?

## Answer by fes (score 8)

https://quant.stackexchange.com/a/58093

I think most people agree that aggregate (index) stock returns have negative skewness. However, this does not appear to be the case for individual stock returns. These two papers find that average skewness of individual stock returns is positive though time-varying: Paper 1 R. Albuquerque, Skewness in Stock Returns: Reconciling the Evidence on Firm Versus Aggregate Returns, RFS, 25-5, May 2012, Pages 1630–1673, Paper 2 Jondeau, Zhang, Zhu, Average Skewness Matters, July 2018, WP. The second paper also has some separate results for large liquid stocks.

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