Skewness Sentiment and Market Anomalies

Abstract

This study demonstrates that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among firms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high-skewness firms in short anomaly portfolios. Skewness does not affect the performance of long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preferences assign relatively larger weights to stocks in short anomaly portfolios. This paper was accepted by Karl Diether, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4898 .