The Next Microsoft Skewness Idiosyncratic Volatility And Expected Returns
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The Next Microsoft? Skewness, Idiosyncratic Volatility, and Expected Returns
Author | : Nishad Kapadia |
Publisher | : |
Total Pages | : 53 |
Release | : 2007 |
Genre | : |
ISBN | : |
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This paper analyzes the low subsequent returns of stocks with high idiosyncratic volatility, documented by prior research. There is substantial time-series co-variation between stocks with high idiosyncratic risk. I examine an alternative measure of aggregate skewness, the cross-sectional skewness of all firms at a given point in time. Cross-sectional skewness helps explain both the common time-variation and the premium associated with firms with high idiosyncratic volatility. Sensitivity to cross-sectional skewness is also related to the underperformance of Initial Public Offerings (IPOs) and small growth stocks. IPOs only underperform if they list in times of high cross-sectional skewness. These results imply that the low returns to IPOs, small growth stocks and highly volatile stocks are a result of a preference for skewness. Finally, proxies for technological change, such as lagged patent grant growth, predict future cross-sectional skewness. This suggests an economic interpretation of cross-sectional skewness as the result of changes in industry structure brought about by shocks such as significant technological change.
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