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RFS Advance Access originally published online on June 3, 2009
Review of Financial Studies 2010 23(1):169-202; doi:10.1093/rfs/hhp041
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Expected Idiosyncratic Skewness

Brian Boyer
Brigham Young University

Todd Mitton
Brigham Young University

Keith Vorkink
Brigham Young University

Send correspondence to Brian Boyer, Marriott School of Management, 640 TNRB, Brigham Young University, Provo, UT 84602; telephone: 801-422-7641; fax: 801-422-0108. E-mail: bhb{at}byu.edu.

JEL Classification: D03, G11, G12


  Abstract

We test the prediction of recent theories that stocks with high idiosyncratic skewness should have low expected returns. Because lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables. Consistent with recent theories, we find that expected idiosyncratic skewness and returns are negatively correlated. Specifically, the Fama-French alpha of a low-expected-skewness quintile exceeds the alpha of a high-expected-skewness quintile by 1.00% per month. Furthermore, the coefficients on expected skewness in Fama-MacBeth cross-sectional regressions are negative and significant. In addition, we find that expected skewness helps explain the phenomenon that stocks with high idiosyncratic volatility have low expected returns.

We appreciate the helpful comments of Andrew Ang, Nicholas Barberis, Antti Ilmanen, Grant McQueen, Jonathan Parker, Steven Thorley, Rossen Valkanov, Tuomo Vuolteenaho, and seminar participants at Brigham Young University and the participants of the 2007 China International Conference in Finance. We acknowledge financial support from the Harold F. and Madelyn Ruth Silver Fund, Intel Corporation, and our Ford research fellowships. We thank Greg Adams for research support.


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