Co-Skewness across Return Horizons

Abstract

In this article, the impact of investment horizon on asset co-skewness is examined both empirically and theoretically. We first detail a strong horizon-based estimation bias for co-skewness. An asset that has positive co-skewness at one horizon may have negative co-skewness for others. This phenomenon is particularly evident for small-capitalization stocks. We then propose a theoretical model to estimate longhorizon co-skewness using data observed at the shortest horizon, which emphasizes the role of adjustment delays in the pricing of market-wide information among securities. Co-skewness is only found to be priced in the cross-section of stock returns for a small range of short horizons, calling into question the universal validity of the three-moment model.