Review of Finance Vol. 27 No. 2 2023
Long-Horizon Stock Returns Are Positively Skewed
Abstract
At long horizons, multiplicative compounding induces strong-to-extreme positive skewness into stock returns; the magnitude of the effect is primarily determined by single-period volatility. Consequently, at horizons greater than 5 years, returns—individual or portfolio—will be positively skewed under reasonable parameterizations. From an investor perspective, the strong positive skewness implies that the mean compound return will serve as a poor guide for typical long-horizon outcomes. Moreover, the large effects of compounding on higher-order moments are shown to affect the validity of Taylor expansions used to approximate preferences for skewness, when applied to returns of annual or longer horizons.
- DOI
- 10.1093/rof/rfac021
- Volume
- 27
- Issue
- 2
- Pages
- 495-538
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref