Volatility-dependent skewness preference

Xiang Gao, Kees G. Koedijk, Zhan Wang

Research output: Contribution to JournalArticleAcademicpeer-review


In this article, the authors propose a variance-dependent explanation for the contradiction between skewness preference and low expected return concerning lottery stocks. They emphasize an overlooked aspect of skewness as a risk measure: the return uncertainty of extreme events. They show that, during periods of low market volatility, investors dislike large-skewness securities owing to a fear of uncertain results. Thus, one observes a positive relation between skewness and expected return because the security is currently undervalued. Conversely, negative associations occur in high-volatility environments. This conditional skewness–return nexus is demonstrated to possess return predictability and can help in adjusting portfolios with profitable buying and selling decisions.

Original languageEnglish
Pages (from-to)43-58
Number of pages16
JournalJournal of Portfolio Management
Issue number1
Publication statusPublished - Nov 2021

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