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Skewness a Pervasive Return Predictor?
February 3, 2020 • Posted in Volatility Effects
Does return distribution skewness predict relative performance of assets across asset classes? In their December 2019 paper entitled “Cross-Asset Skew”, Nick Baltas and Gabriel Salinas investigate realized skewness as a relative return predictor within and across four asset classes (equity indexes, government bonds, currencies and commodities). Specifically, at the end of each month, they:
- For each asset, measure skewness using daily returns over the last 12 months.
- Within each asset class, rank assets by skewness and reform a skewness portfolio that is long rank-weighted assets with relatively low (most negative) skewnesses and short those with relatively high (least negative or positive) skewnesses, with equal dollars allocated to the long and short sides.
- Scale each asset class skewness portfolio to full-sample volatility of 10%, and reform a Global Skewness Factor (GSF) portfolio that equally weights these scaled asset class portfolios.
Using daily returns for 19 equity index futures, 9 government bond futures, 9 currency forwards and 24 commodity futures series, along with monthly value, momentum and carry factor returns, during January 1990 through December 2017, they find that: (more…)
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