Skewed greed : realized skewness or maximum returns, which statistical anomaly is better at capturing greed in financial markets?

• Autor(a) principal: Abrantes, João Rafael Pereira Gaspar Mendes
• Data de Publicação: 2023
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/41423
• topic: Realized skewness; Statistical anomalies; Extreme returns; Lottery-like payoffs; Cross-sectional return predictability; Assimetria realizada; Retornos extremos; Retornos semelhantes aos de uma lotaria; Previsibilidade dos retornos; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

Investors like to have the possibility of very high returns, even if they are highly unlikely. Because of this, they prefer positively skewed assets, which are consequently overvalued generating lower returns. This work studies the implications of extraordinarily skewed returns in the cross-sectional pricing of stocks in light of previous evidence that investors favor assets with lottery-like payoffs and the fact that many investors are inadequately diversified. Analyzing data from US stocks since 1927 I found that, realized skewness has an economically important and statistically significant negative relationship with expected stock returns. This realized-skewness sorted strategy rewards its investors with an average monthly return of 0.7% with a corresponding t-stat of 27.2 and a Sharpe Ratio of 0.89, with certain unexpected calendar months – April and July – outperforming the market with Sharpe ratios of 1.5 and 2.24, respectively. My findings are of interest to investors as this strategy is easy to implement and this work lays out the path for further academic research regarding skewness related trading strategies.