Skewed asset returns are a puzzling phenomenon and cause various behavior amongst investors. Some prefer stocks with a major right skew, which, like playing the lottery, occasionally hit the jackpot and deliver outstanding returns. Other investors attempt to avoid such volatility and select stocks that should not skewed or are even skewed to the left.
But how does yield skew relate to other aspects in asset pricing? Are investors perhaps betting on certain aspects precisely because they need a lottery-like skew of their returns?
To answer these questions, we created cross-sectional growth and value portfolios and examined the distribution of monthly returns over five-year periods. From an investment universe of all stocks traded on the NYSE and NASDAQ since 1975, we assembled our growth and value portfolios from the quintile of stocks with the best and lowest P/E ratios.
On average, our growth portfolio had a greater right skew in its returns than our worth portfolio. This was true for six of the ten periods.
Growth Stocks: Monthly Returns
| Mean | Median | volatility | Skewness | |
| 1975 to 1980 | 3.02% | 0.78% | 53.24% | 8.92 |
| 1980 to 1985 | 1.33% | 0.02% | 44.26% | 1.10 |
| 1985 to 1990 | 2.04% | 0.85% | 55.99% | 20.44 |
| 1990 to 1995 | 1.88% | 0.38% | 59.80% | 10.51 |
| 1995 to 2000 | 3.44% | 1.44% | 67.22% | 8.99 |
| 2000 to 2005 | 1.43% | 0.01% | 71.05% | 2.54 |
| 2005 to 2010 | 0.71% | 0.02% | 48.44% | 2.14 |
| 2010 to 2015 | 1.50% | 0.90% | 41.30% | 7.30 am |
| 2015 to 2020 | 6.94% | 0.57% | 50.22% | 9.97 |
| 2020 to 2022 | 1.22% | 0.28% | 59.21% | 5.10 |
| Average | 2.35% | 0.52% | 55.07% | 7.70 |
Value Stocks: Monthly Returns
| Mean | Median | volatility | Skewness | |
| 1975 to 1980 | 2.44% | 0.00% | 47.26% | 2.07 |
| 1980 to 1985 | 1.66% | 0.01% | 44.25% | 1.94 |
| 1985 to 1990 | 1.26% | 0.02% | 48.23% | 14.73 |
| 1990 to 1995 | 1.26% | 1.02% | 55.05% | 2.55 |
| 1995 to 2000 | 1.23% | 0.00% | 52.13% | 5.62 |
| 2000 to 2005 | 2.43% | 1.15% | 18.08% | 9.31 |
| 2005 to 2010 | 0.68% | 0.00% | 48.75% | 2.24 |
| 2010 to 2015 | 1.70% | 1.02% | 38.59% | 1.85 |
| 2015 to 2020 | 0.86% | 0.56% | 36.92% | 1.45 |
| 2020 to 2022 | 1.38% | 0.53% | 82.10% | 9.30am |
| Average | 1.49% | 0.43% | 47.13% | 5.10 |
So what can we learn from these results? Our theory is that skewness tends to vary depending on investor preferences. That is, when a specific factor is in fashion, the skewness increases significantly so long as it’s in fashion. For example, growth stocks were all the craze because the dot-com bubble inflated from 1995 to 2000, they usually exhibited a major skewness, while value stocks exhibited a definite lack of it.
Growth Stocks: Monthly Returns, 1995 to 2000
From 2010 to 2020, the recognition of growth stocks increased again, while value stocks underperformed and again exhibited an absence of skew in returns.
Value Stocks: Monthly Returns, 2010 to 2015
These results don’t tell us which direction the association is, only that an association exists. The data tells us that when a specific asset pricing style is popular with investors, the returns for that style exhibit greater skewness.
In summary, investors in growth stocks could also be in search of lottery-like payouts, especially when such stocks are trending.
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Photo credit: ©Getty Images/piotr_malczyk
