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Market Skewness and Stock Return Predictability: New Evidence from China

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  • Yuqing Feng
  • Mengxi He
  • Yaojie Zhang

Abstract

Market skewness is an important indicator of market risk. We decompose market skewness into good and bad skewness and further study the relationship between various skewness and the stock market returns in China. Empirical results show that good skewness can significantly predict stock market returns in- and out-of-sample. Furthermore, compared to macroeconomic variables and variance variables, good skewness can provide complementary or dominant information. We also find that good skewness can provide helpful information in predicting stock market returns beyond what market skewness and bad skewness provide. A mean-variance investor can obtain sizable economic gains by using good skewness. The economic source of predictability is the cash flow channel.

Suggested Citation

  • Yuqing Feng & Mengxi He & Yaojie Zhang, 2024. "Market Skewness and Stock Return Predictability: New Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 60(2), pages 233-244, January.
    • Handle: RePEc:mes:emfitr:v:60:y:2024:i:2:p:233-244
    DOI: 10.1080/1540496X.2023.2217327
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