Are Stocks Lotteries? The Shape of Distribution Matters
As shown by studies, the shape of return distributions can also predict future returns. Investors, to some extent, treat stocks as lotteries that can reward them with a substantial fortune. In consequence, the right-skewed distributions, where there is a large chance of exceptionally high returns, tend to disappoint in the end. The impact of skewness can be measured in various ways: from very sophisticated measures, like co-skewness or idiosyncratic skewness, to plain and simple ones, like maximum daily return over the previous month. All of these measures can serve as powerful predictors of future returns. The authors reviewed the skewness-based strategies, providing both explanations and evidence, and re-examined them in 24 international equity markets.
- Aziz, T., & Ansari, V. A. (2017, in press). Are extreme negative returns priced in the Indian stock market? Borsa Istanbul Review. https://doi.org/10.1016/j.bir.2017.09.002.
- Bali, T. G., Engle, R. F., & Murray, S. (2016). Empirical asset pricing: The cross section of stock returns. Hoboken: Wiley.Google Scholar
- Cao, X. (2015b). Are idiosyncratic skewness and idiosyncratic kurtosis priced? (Brock University working paper). Available at https://dr.library.brocku.ca/handle/10464/6426. Accessed 14 Oct 2017.
- Cheon, Y.-H., & Lee, K.-H. (2017, in press). Maxing out globally: Individualism, investor attention, and the cross section of expected stock returns. Management Science. https://doi.org/10.1287/mnsc.2017.2830.
- de Mendonca, F. P., Klotzle, M. C., Pinto, A. C. F., & da Silva Montezano, R. M. (2012). The relationship between idiosyncratic risk and returns in the Brazilian stock market. Revista Contabilidade & Finanças, 23(60). Available online at: http://www.scielo.br/scielo.php?pid=S1519-70772012000300009&script=sci_arttext&tlng=en. Accessed 14 Oct 2017.CrossRefGoogle Scholar
- Ghysel, E., Plazzi, A., & Valkanov, R. (2011). Conditional skewness of stock market returns in developed and emerging markets and its economic fundamentals (Working paper). Available at http://www.unc.edu/~eghysels/papers/GPV_Oct_6_2011_EG.pdf. Accessed 14 Oct 2017.
- Kraus, A., & Litzenberger, R. H. (1976). Skewness preference and the valuation of risk assets. Journal of Finance, 31(4), 1085–1100.Google Scholar
- Lintner, J. (1965b). Security prices, risk and maximal gains from diversification. Journal of Finance, 20(4), 587–615.Google Scholar
- Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425–442.Google Scholar
- Stevenson, R. W. (1999, January 29). Asked about internet issues, the Fed Chairman Shrugs. The New York Times. Available at http://www.nytimes.com/1999/01/29/business/the-markets-asked-about-internet-issues-the-fed-chairman-shrugs.html. Accessed 11 Oct 2017.
- Teplova, T., & Mikova, E. (2011). A Higher moment downside framework for conditional and unconditional CAPM in the Russian stock market. Eurasian Economic Review, 1, 157–178.Google Scholar
- Umutlu, M., & Bengitöz, P. (2017). The cross-section of expected index returns in international stock markets. Working paper presented at the 2017 Infiniti Conference in Valencia, Spain.Google Scholar
- Zaremba, A., & Andreu Sánchez, L. (2017). Paper profits or real money? Trading costs and stock market anomalies in country equity indices. Available at https://doi.org/10.2139/ssrn.3038514
- Zaremba, A., & Umutlu, M. (2018, in press). Strategies can be expensive too! The value spread and asset allocation in global equity markets. Applied Economics.Google Scholar