Spikes Can Explain Returns

Recently there has been a lot of research on the question of whether higher moments of return other than volatility (specifically, the skewness of returns) helps to explain equity returns. (I’ve included a brief definition of skewness and a demonstrative example of it below.)

For instance, the role of idiosyncratic skewness has been put forward to explain why investors actually hold under-diversified portfolios. Investors with a preference for skewness may under-diversify their portfolio to invest more in assets that have positive idiosyncratic skewness. Thus, stocks with high idiosyncratic skewness will pay a premium.

Read the rest of the article on ETF.com.