Idiosyncratic Kurtosis and the Cross-Section of Stock Returns

Jang, Jeewon

Korean Journal of Financial Studies 2016;45(5):1001-1034.
Published online December 31, 2016.

Jeewon Jang

극단적 투자성과에 대한 회피 성향과 주식 수익률의 횡단면

장지원

Abstract

Using historical estimates of skewness and kurtosis based on daily realized stock returns, we find that stocks with high idiosyncratic kurtosis earn higher returns subsequently on average, while none of idiosyncratic skewness, systematic skewness, and systematic kurtosis is significantly related to the cross-section of stock returns in the Korean stock market. By constructing double-sorted portfolios based on idiosyncratic volatility and idiosyncratic kurtosis, we find that the trading strategy buying stocks with high kurtosis and low volatility that are relatively underpriced and selling stocks with low kurtosis and high volatility that are relatively overpriced yields a monthly return of 1.70% on average. The positive cross-sectional relation between idiosyncratic kurtosis and subsequent returns is much stronger for stocks with high idiosyncratic volatility. The cross-sectional relation is not accounted for by various firm characteristics, nor risk factors. Our findings suggest that stocks with high idiosyncratic kurtosis can be underpriced and earn relatively high returns subsequently, since a group of investors is averse to high kurtosis and thus they are not willing to pay for stocks with high kurtosis.

Key Words: 고유첨도,과소평가,주식 수익률 횡단면,첨도회피 성향,한국 주식시장,Cross-Section of Stock Returns,Idiosyncratic Kurtosis,Korean Stock Market,Kurtosis Preference,Mispricing