Abstract:
With high frequent stock index data, this paper constructs the realized skewness of Chinese stock market and test its predictive power for aggregate stock market excess return. Results show that the realized skewness significantly predicts the next month excess return on Chinese stock market. In-sample and out-of-sample R2are 3.39% and 2.24%, respectively. After controlling for a set of variables, this conclusion still holds. In addition, based on alternative 4 constructing methods, the realized skewness significantly predicts excess returns on both of Shanghai and Shenzhen stock markets. The predictive power is further improved when combine all 4 skewness measures together. Economically, the predictive power of realized skewness for stock market return comes from its ability to predict future trading activity of the Chinese stock market.
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