On the predictive ability of conditional market skewness

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This study analyzes the capacity of conditional market skewness to predict future market returns over a recent period of time, which contains the last two major market crises: the financial crisis of 2008 and the COVID-19 pandemic in 2020. The results show that conditional market skewness performs well in terms of predicting future S&P 500, Nasdaq Composite and EUR/USD returns, even after controlling for business cycle fluctuations. However, contrary to what is expected, it is found that during this period containing two major financial crises, the relationship between conditional market asymmetry and future returns is positive. The rationale behind this finding is that during periods with major crises, when large drops in asset prices that sharply reduce market asymmetry occur, many investors find prices attractive, increasing buying pressure and thus reducing market returns in the next period. • Conditional market skewness performs well at predicting future market returns. • In periods of major crises the relationship market skewness-future returns is positive. • Conditional market skewness outperforms sample skewness in predicting market returns.