Stock Return Asymmetry: Beyond Skewness, a paper co-authored our school’s Assistant Professor Zhu Yifeng, Assistant Professor Jiang Lei from Tsinghua University, Assistant Professor Wu Ke from Renmin University of China, and Professor Zhou Guofu from Washington University in St. Louis, was officially published as the lead article in the 2020 55th Volume of Journal of Financial and Quantitative Analysis, a prestigious journal in the field of finance.
In previous studies, skewness is generally adopted as an asymmetry measure, and the cross-sectional relationship between skewness and future stock returns is inconclusive. This paper comes up with two new asymmetry measures, which differ from traditional skewness measures, and are based on overall data distribution rather than merely third-order central moment. Next, on the assumption that investors have similar expected utility between prospects, the paper builds a model to describe the new asymmetry measures are negatively correlated with future returns. Then through symmetry measurement testing, it describes that new asymmetry measures can detect asymmetry more effectively than skewness, and find more stocks whose returns are asymmetrically distributed than skewness based on data from the US stock market. By using the US stock market data in 1963-2015, it finds that the greater the upside asymmetry in past returns, the lower are the future returns in the cross-section. The negative correlation between upside asymmetry and future returns cannot be explained by existing factors or stock characteristics, which shows the cross-sectional variation of different stock returns originates in part from asymmetry, but traditional skewness has no obvious effect on future returns. Lastly, the paper finds that the reason why the effect of skewness on future returns is inconclusive is that whether such effect is positive or negative is associated with market risks, stock idiosyncratic volatility, investor confidence index, market liquidity and unrealized earnings of investors. For example, when investor confidence rises high, skewness is negatively correlated with future returns; but when investor confidence is low, skewness is positively correlated with future returns.
The main contributions made by the paper include: (1) It puts forward two new asymmetry measures. (2) It theoretically explains that the new upside asymmetry measure of past returns is negatively correlated with future returns. (3) It shows that new asymmetry measures can detect asymmetry more effectively than skewness through symmetry measurement testing. (4) By using the US stock market data, it finds that upside asymmetry is negatively correlated with future returns in cross-section. Thus it finds a new US stock market anomaly or investment strategy which is built on theoretical models, and so of guiding significance to the building of similar investment strategies in other markets.