Skewness in Stock Returns: Reconciling the Evidence on Firm Versus Aggregate Returns

Albuquerque, Rui A.

doi:10.2139/ssrn.1799413

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Skewness in Stock Returns: Reconciling the Evidence on Firm Versus Aggregate Returns

Review of Financial Studies Vol. 25, 2012

71 Pages Posted: 31 Mar 2011 Last revised: 29 Dec 2014

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

There are 3 versions of this paper

Date Written: December 2, 2011

Abstract

Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to conditional asymmetric stock return correlations and negative skewness in aggregate returns. I provide evidence consistent with the model predictions.

Keywords: Skewness, earnings announcements, dividend announcements, cross-sectional heterogeneity

JEL Classification: G12, G14, D82

Suggested Citation: Suggested Citation

Albuquerque, Rui A., Skewness in Stock Returns: Reconciling the Evidence on Firm Versus Aggregate Returns (December 2, 2011). Review of Financial Studies Vol. 25, 2012, Available at SSRN: https://ssrn.com/abstract=1799413 or http://dx.doi.org/10.2139/ssrn.1799413