Asymmetry in Australian Equity Returns

Abstract

The importance of asymmetry in investment assessment is established and past research into the matter for Australian and U.S. equities is reviewed. Asymmetry, especially of the positive variety, is found to be a prevalent empirical phenomenon for Australian shares. Diversification is found to increase average asymmetry decreases with diversification. Evidence regarding the stationarity of crosssectional asymmetry distributions is mixed.

Portfolio optimisation with higher moments of risk at the Pakistan Stock Exchange

“…Our results are broadly aligned with the studies confirming the presence of skewness and kurtosis risk in different markets such as Aggarwal et al (1989), Aracioglu et al (2011), Beedles (1986, Canela and Collazo (2007) and others, and clearly show strong tradeoffs between returns and additional dimensions of risks (skewness and kurtosis) which was traditionally assumed to be present only between returns and variance. The investors aware of these new dimensions of risks would have to accept lower returns if they chose to optimise these risks (skewness and kurtosis) in addition to the risk captured through the variance.…”

“…This assumption makes the entire process of optimisation prone to severe underestimation of investment risk, as it conveniently assumes the second moment (variance) is capable to proxy the risk of any investment in its entirety. However, several studies in empirical finance confirm that asset returns distributions are characterised by negative skewness and excess kurtosis, and so the assumption for a normal distribution is continuously being violated (Aggarwal, Rao, & Hiraki, 1989;Beedles, 1986;Lux & Marchesi, 2000). If portfolio returns are negatively skewed, the probability of getting negative returns is higher than the positive returns and vice versa.…”

Testing the Multivariate Normality of Australian Stock Returns

“…I I Tests of asset pricing models, however, often utilise size and/or industry portfolios to test the mean-variance efficiency of the market proxy. For example, the popular Gibbons, Ross and Shanken (1989) test of the SharpeLintner CAPM involves running market model regressions for size portfolios and II For example, see Praetz and Wilson (1978), StokIe (1982b) and Beedles (1986) calculating a test statistic, the distribution of which is based on the assumption that market model residuals are multivariate normal. Therefore, while the multivariate normality of raw stock returns is of some interest, the multivanate normality of market model residuals is of direct relevance to several popular tests of asset pricing models.…”

“…Hence, Stokie's (1982b, p. 168) conclusion that '[there are] no conclusive grounds for rejecting the normal distribution as a representatIOn of the monthly log-returns' is not entirely consistent with his findings. Beedles (1986) notes that the said findings evidence more asymmetry in return distributions than Stokie recognises. Over the 1974-1980 period, Beedles examines the cross-sectional and time-series properties of return asymmetry.…”

Returns to Australian Investment Newsletter Recommendations

“…The 149 recommendations from Intelligent Investor performed least impressively, earning a mean return of 7.9% that was bettered by 339 control portfolios, however it should be recalled that The Intelligent Investor ostensibly concentrates on identifying undervalued larger stocks and it may require more than one year (our maximum holding period) for the newsletter's stock selection ability to be evaluated. The explanation for the Full Sample portfolio showing better relative performance than any of its constituent portfolios lies in the positive asymmetry in firms' returns, first documented in ASX stocks by Beedles (1986). A minority of the 1,000 control portfolios will include, by chance, a disproportionately high number of firms with an extreme positive return.…”