DP7896 Skewness in Stock Returns:Reconciling the Evidence on Firm versus Aggregate Returns

Author(s): Rui Albuquerque
Publication Date: June 2010
Keyword(s): announcement events, crosssectional heterogeneity, firm returns, market returns, Skewness
JEL(s): D82, G12, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7896

Aggregate stock market returns display negative skewness. Firm-level stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This paper provides a unified theory that reconciles the two facts. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to negative skewness in aggregate returns. I provide evidence consistent with the model predictions.