DP10601 Expected Skewness and Momentum

Author(s): Heiko Jacobs, Tobias Regele, Martin Weber
Publication Date: May 2015
Keyword(s): behavioral finance, market efficiency, momentum, return predictability, skewness
JEL(s): G12, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10601

Motivated by the time-series insights of Daniel and Moskowitz (2014), we investigate the link between expected skewness and momentum in the cross-section. The three factor alpha of skewness-enhanced (-weakened) momentum strategies is about twice (half) as large as the traditional momentum alpha. In fact, skewness is among the most important cross-sectional determinants of momentum. Our findings do not neatly fit within a specific prominent theory of momentum. Due to the simplicity of the approach, its economic magnitude, and its existence among large stocks and in the recent past, the results appear difficult to reconcile with the efficient market hypothesis.