Skewness in stock returns: reconciling the evidence on firm versus aggregate returns

Rui Albuquerque*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

62 Citations (Scopus)

Abstract

Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to conditional asymmetric stock return correlations and negative skewness in aggregate returns. I provide evidence consistent with the model predictions.
Original languageEnglish
Pages (from-to)1630-1673
Number of pages44
JournalReview of Financial Studies
Volume25
Issue number5
DOIs
Publication statusPublished - May 2012

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