Research On The Influence Of Skewness On Stock Returns In Chinese Stock Market

In recent years, study on the influence of skewness on security returns have attracted more and more academic attention. Dose skewness help explain the cross-sectional returns? This paper identifies the influence of skewness, system skewness and idiosyncratic skewness on stock returns, and analyses whether the relationship between skewness and returns is only caused by idiosyncratic skewness. In addition, the paper discusses the effect of on skewness on returns under margin trading system.The study sample is A shares in Shanghai and Shenzhen stock markets from 1997 January and 2013 December. Both traditional method and quantile-based method are used to measure skewness. The estimation method of system skewness is similar to β. While the estimation of idiosyncratic skewness is based on Fama-French three factor model. With portfolio analysis method and Fama-Macbeth (1973) regression, we document the effect of skewness on expected returns. In addition, to study the effect of margin trading system on skewness, we select stocks which can be sold short as study sample. The conclusions of empirical analysis are as following. First, skewness is significantly negatively related with stock returns. Skewness helps to explain the cross-sectional returns, even after controlling for market risk, size, book-to-market ratio, illiquidity ratio. The study of subintervals shows that the negative relation between stock skewness and stock returns is stable. Second, there is a significant positive relationship between the systematic skewness and expected returns. However, after we control the β coefficient, the relation above disappeared, which shows that the company characteristics captured by systematic skewness may have been reflected by the beta coefficient. Third, there is an obvious and negative relationship between idiosyncratic skewness and stock returns, even in the control of the market risk, firm size, book-to-market ratio, liquidity indicator and systematic skewness. Fourth, the relation between skewness and expected returns is mainly caused by idiosyncratic skewness. Fifth, obvious effects of size, book to market value ratio, and illiquidity premium, are found in Chinese stock market. Sixth, under securities margin trading, the stock return distribution becomes right skewed. And the effect of skewness on returns becomes insignificant, which means that investors show less preference to right skewed securities.