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.
Original languageEnglish
Article numberrfx036
Pages (from-to)1841-1876
Number of pages36
JournalReview of Finance
Volume22
Issue number5
Early online date26 Jul 2017
DOIs
Publication statusPublished - 5 Aug 2018

Keywords

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

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