Individual Investors, Average Skewness, and Market Returns

Abstract

Understanding individual investors’ short-term behavior toward skewness is essential for the management and investment of corporate social responsibility because the skewness-seeking behavior of individual investors, which causes a bubble in the market, makes the market as a whole more vulnerable, and it is difficult for the market to be sustainable. In the Korean stock market, we investigated whether average skewness can predict future market returns at the market level and whether the mispricing is associated with demand for the skewness of individual noise traders. Measuring the demand for skewness by the proportion of trading money of individual investors, we found that average skewness negatively predicts future market excess return when the demand for skewness is strong. The result is robust to controlling for market variance as well as other predictors. Our finding indicates that the overall market is overpriced when individual investors excessively trade to seek huge returns in spite of a small probability.

Do average higher moments predict aggregate returns in emerging stock markets?

“…(2020), who found significant positive coefficients of average skewness in only four out of 22 international developed markets. Our results are also consistent with the findings of Li et al (2020) and Kim and Park (2020), who reported an insignificant relationship between average skewness and market returns in Taiwan and South Korea, respectively. Further, we report that EW kurtosis is significant in Indonesia (0.216, t 5 2.76) and Pakistan (0.356, t 5 3.37) only, whereas VW kurtosis significantly predicts subsequent market excess returns in China (0.585, t 5 2.87), Pakistan (0.267, t 5 2.34), Philippines (0.365, t 5 2.67) and South Korea (À0.575, t 5 À1.85).…”