Skewness in Stock Returns, Periodic Cash Payouts, and Investor Heterogeneity

Abstract

This paper analyzes the asset pricing implications of periodic cash payouts within the context of a stationary rational expectations model with heterogeneous investors. The periodicity of cash payouts provides a natural motivation for time-varying conditional volatility in stock returns. I show that the unconditional distribution of returns is a mixture of normals distribution, which has non-trivial skewness properties. I examine how conditional volatility, trading volume and skewness in stock returns are related to information dispersion and liquidity in the stock market. The model provides a rationale for negative skewness in aggregate stock returns--while generating positive skewness in firm level returns--which is based on cross-sectional dispersion of event dates. Evidence on this prediction is also given.

Keywords: Skewness, investor heterogeneity, period cash payouts, turnover

JEL Classification: G12, G14, D82