Paper: arXiv 2604.07870

Authors: Mykola Babiak, Jozef Barunik, Josef Kurka

Abstract

Cross-sectional dispersion in firm-level realized skewness is significantly and negatively related to future stock market returns. The predictive power of skewness dispersion is robust to in-sample and out-of-sample estimation and is incremental over a broad set of existing predictors, with only a few alternatives retaining independent explanatory ability. Skewness dispersion also delivers substantial economic gains in portfolio allocation. Its forecasting power is concentrated in months with monetary policy announcements, reflecting an information-based mechanism. The empirical evidence suggests that skewness dispersion captures the gradual incorporation of macro news into prices, which is driven by variation in aggregate risk and valuation adjustments.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 6.0/10 (capped from 8.5: transaction costs not modelled; see penalty flags)
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies primarily on empirical econometric methods rather than complex mathematical derivations, presenting robust in-sample and out-of-sample forecasting tests. It provides strong novelty by demonstrating that firm-level skewness dispersion predicts aggregate stock market returns and connects this to monetary policy announcements.

Research Flowchart

  flowchart TD
    A[Research Goal: Predict Stock Market Returns using Skewness Dispersion] --> B[Data Inputs: Firm-Level Realized Skewness & Macro Predictors]
    B --> C[Compute Cross-Sectional Skewness Dispersion & Run In/Out-of-Sample Regressions]
    C --> D[Analyze Economic Value & Subsample Mechanics]
    D --> E1[Key Finding: Significant Negative Predictability & Substantial Portfolio Gains]
    D --> E2[Key Finding: Effect Concentrated in Monetary Policy Months via News Reaction]