Ex Ante Skewness and Expected Stock Returns





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    • Conrad is with the Department of Finance, Kenan-Flagler Business School, University of North Carolina at Chapel Hill; Dittmar is with Department of Finance, Stephen Ross School of Business, University of Michigan; Ghysels is with the Department of Finance, Kenan-Flagler Business School, and Department of Economics, University of North Carolina at Chapel Hill. An earlier version of the paper was circulated under the title “Skewness and the Bubble.” All errors are the responsibility of the authors. We especially thank Cam Harvey for many insightful comments. We also thank Robert Battalio, Patrick Dennis, and Stewart Mayhew for providing data and computational code. We thank Rui Albuquerque, Andrew Ang, Leonce Bargeron, John Griffin, Paul Pfleiderer, Lukasz Pomorski, Feng Wu, and Chu Zhang for helpful comments and suggestions, as well as seminar participants at Babson College, Berkeley, Boston College, the 2009 China International Conference in Finance, Cornell University, Dartmouth College, Erasmus University, Financial Intermediation Research Society 2009 Conference, National University of Singapore, New York University Stern, the Ohio State University, Queen's University Belfast, Stanford University, the Universities of Amsterdam, Arizona, Michigan, Tilburg, Texas, and Virginia, and the 2010 European and Western Finance Association conferences. The paper was awarded the 2009 China International Conference in Finance Best Paper Award.


We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk-neutral returns distribution. We find that individual securities’ risk-neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross-section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co-moments, individual securities’ skewness matters.