Make 24bps a week trading skewness?

Make 24bps a week trading skewness?

November 5, 2012 Research Insights, Low Volatility Investing
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(Last Updated On: March 14, 2017)

That is what Amaya, Christofferson, Jacobs, and Vasquez find.

We use intraday data to compute weekly realized variance, skewness, and kurtosis for equity returns and assess whether this week’s realized moments are informative for the cross-section of next week’s stock returns. We sort stocks each week according to their realized moments, form decile portfolios, and analyze subsequent weekly returns. We find a very strong negative relationship between realized skewness and next weeks stock returns. A trading strategy that buys stocks in the lowest realized skewness decile and sells stocks in the highest realized skewness decile generates an average weekly return of 24 basis points with a t-statistic of 3:65. Our results on skewness are robust across a wide variety of implementations, unlike those for alternative skewness measures. They are also robust across sample periods, portfolio weightings, and firm characteristics, and are not captured by the Fama-French and Carhart factors. We find some evidence that the relationship between realized kurtosis and next week’s stock returns is positive, but the evidence is not always robust and statistically significant. We do not find a strong relationship between realized volatility and next week’s stock returns.

 

Here is the table with all the goodies:

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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.