Predictable & Skewed Returns

There has been a lot of research recently that investigates the link between stock returns and higher moments of the return distribution, specifically the skewness of returns. This link, unfortunately, is frequently ignored by more standard measures of market risk and volatility.

Skewness, if you’ll recall, measures the asymmetry of a distribution. In terms of the stock market, the asymmetric pattern of historical returns doesn’t resemble a normal distribution, also known as the familiar bell curve. Negative skewness occurs when the values to the left of (less than) the mean are fewer but farther from it than values to the right of (greater than) the mean.

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