Higher realized moments and stock return predictability

Author Affiliation

Saqib Sharif is Associate Professor at Institute of Business Administration (IBA), Karachi

Wali Ullah is Professor and Research Fellow-CBER at Institute of Business Administration (IBA), Karachi

Faculty / School

School of Economics and Social Sciences (SESS)

Department

Department of Economics

Was this content written or created while at IBA?

Yes

Document Type

Article

Source Publication

Romanian Journal of Economic Forecasting

Disciplines

Econometrics | Economics | Finance

Abstract

This study exploits information contained in high frequency sample data by computing higher realized moments of individual firms in the emerging stock market of Pakistan. Furthermore, the relation of higher moments with future stock returns is examined by constructing decile portfolios based on weekly realized volatility, skewness and kurtosis to predict the next week return of the trading strategy that takes long position for portfolio of stocks having high realized moment and takes short position for portfolio of stocks having low realized moment. The long short spread is significant for equal weighted weekly returns based on realized volatility. The long short weekly return is positive and highly significant for realized skewness, 1.659 and 1.969 (in bps) with t-statistics of 7.92 and 14.027 for value and equal weighted portfolios respectively. The result for realized skewness is also supported by Carhart’s Alphas. Similar results are obtained for realized kurtosis, 0.427 and 0.664 (in bps) of long short return, with t-statistics of 2.079 and 4.049 for value and equal weighted portfolios respectively. The evidence suggests that realized skewness and kurtosis can predict the next week’s moment based on cross sectional stock returns.

Indexing Information

HJRS - X Category, Scopus, Web of Science - Social Sciences Citation Index (SSCI)

Journal Quality Ranking

Impact Factor: 0.831

Publication Status

Published

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