Systematic Skewness and Stock Returns

This paper revisits the relation between systematic skewness and returns, showing two main findings. First, the systematic skewness premium in individual stocks is time varying. When either skewness preference or systematic skewness is above rather than below the median, the premium is 4% higher. The combined effect of the two induces time variation in the premium of about 7%. Second, systematic skewness has significant additional explanatory power in explaining returns relative to most common characteristics, except size and momentum. These two results imply that skewness preference is an important determinant of expected returns providing a possible rationale for size and momentum. (JEL G11, G12)