Skewness, Individual Investor Preference, and the Cross-section of Stock Returns

Tse-Chun Lin, Xin Liu

Research output: Contribution to journalArticle

Abstract

We find a robust negative relation between skewness/lottery-like features, proxied by maximum return (MAX) over the last month, and future returns for stocks preferred by individual investors. This negative relation is nonexistent for the rest of stocks. We identify stocks preferred by individual investors through bundling ten stock characteristics associated with their stock preferences. The negative relation between MAX and future return is produced by the stocks preferred by individuals that account for less than 5% of the overall market capitalization. Our results are robust to alternative definitions of MAX and lottery-like features such as total, idiosyncratic, and expected skewness.
LanguageEnglish
Article numberrfx036
Pages1 - 36
Number of pages36
JournalReview of Finance
Early online date26 Jul 2017
DOIs
StatusE-pub ahead of print - 26 Jul 2017

Fingerprint

Skewness
Individual investors
Preferred stock
Cross-section of stock returns
Lottery
Market capitalization
Bundling

Keywords

  • MAX
  • Lottery-like Features
  • Skewness
  • Individual Investor Preference Index
  • Cross-sectional Return predictability

Cite this

Skewness, Individual Investor Preference, and the Cross-section of Stock Returns. / Lin, Tse-Chun; Liu, Xin.

In: Review of Finance, 26.07.2017, p. 1 - 36.

Research output: Contribution to journalArticle

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