Skewness Dispersion and Stock Market Returns

TL;DR

This paper finds that cross-sectional dispersion in firm-level realized skewness predicts future stock market returns, especially around monetary policy announcements, and offers economic benefits in portfolio management.

Contribution

It introduces skewness dispersion as a novel predictor of stock returns, demonstrating its robustness and incremental predictive power over existing factors.

Findings

Skewness dispersion negatively predicts future stock returns.

Its predictive power is strongest during monetary policy announcement months.

Skewness dispersion captures macro news incorporation into prices.

Abstract

Cross-sectional dispersion in firm-level realized skewness is significantly and negatively related to future stock market returns. The predictive power of skewness dispersion is robust to in-sample and out-of-sample estimation and is incremental over a broad set of existing predictors, with only a few alternatives retaining independent explanatory ability. Skewness dispersion also delivers substantial economic gains in portfolio allocation. Its forecasting power is concentrated in months with monetary policy announcements, reflecting an information-based mechanism. The empirical evidence suggests that skewness dispersion captures the gradual incorporation of macro news into prices, which is driven by variation in aggregate risk and valuation adjustments.