On the Surprising Explanatory Power of Higher Realized Moments in Practice

TL;DR

This paper empirically examines the predictive power of higher realized moments, specifically skewness and kurtosis, for individual stock returns and variances on a daily scale, revealing that kurtosis forecasts future variance while skewness does not predict daily returns.

Contribution

It provides new empirical evidence on the forecasting abilities of realized skewness and kurtosis at the individual stock level on a daily basis, contrasting with prior market-wide studies.

Findings

Realized kurtosis significantly forecasts future stock variance.

Realized skewness lacks predictive power for short-term daily returns.

The study focuses on daily scale, individual stocks, contrasting with previous market-wide analyses.

Abstract

Realized moments of higher order computed from intraday returns are introduced in recent years. The literature indicates that realized skewness is an important factor in explaining future asset returns. However, the literature mainly focuses on the whole market and on the monthly or weekly scale. In this paper, we conduct an extensive empirical analysis to investigate the forecasting abilities of realized skewness and realized kurtosis towards individual stock's future return and variance in the daily scale. It is found that realized kurtosis possesses significant forecasting power for the stock's future variance. In the meanwhile, realized skewness is lack of explanatory power for the future daily return for individual stocks with a short horizon, in contrast with the existing literature.