Return Asymmetry and the Cross Section of Stock Returns

Abstract

Empirical evidence on the relation between stock returns and skewness of the return distribution is mixed. As skewness is heavily influenced by the tail behaviour of the return distribution, it is possible for two distributions with identical skewness to have quite different asymmetry. In this article, we introduce a measure of asymmetry which can characterise the shape of an asset return distribution in its entirety and is therefore less affected by the tail behaviour. Our empirical analysis indicates that stocks with high return asymmetry exhibit low expected returns. The negative relation between return asymmetry and expected returns remains strong after controlling for size, book-to-market, momentum, short-term reversals, liquidity, idiosyncratic volatility and skewness. Our results are consistent with the skewness preference theories proposed by Brunnermeier et al. (2007) and Barberis and Huang (2008).