Publication Type

Working Paper

Publication Date

6-2002

Abstract

Several recent articles report evidence of predictability in the skewness of equity returns, raising hopes that predictability in third moments will be useful for forecasting the probability of tail events. The evidence is unfortunately difficult to interpret, partly because they were obtained mainly from parametric models of time-varying conditional skewness, and because little is known about the behavior of such models, for instance, when there are outliers. We investigate a non-parametric approach to testing for predictability in skewness. Specifically, we explore the size and power of a Runs tests, and compare this approach with other tests. A re-examination of daily market returns reveals mild evidence of predictability in skewness. Incorporating this conditional heteroskewness into standard volatility models hardly improves out-of-sample forecasts of tail probabilities.

Keywords

Conditional skewness, Runs test, ARCD model, Hansen t, heteroskewness, heterokurtosis, third moments, time-varying higher moments

Discipline

Econometrics

Research Areas

Econometrics

First Page

1

Last Page

28

Publisher

National University of Singapore, Dept of Economics

City or Country

Singapore

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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