J. Conrad, R.F. Dittmar, and E. Ghysels: Skewness and the Bubble

April 16, 2007

Motivated by the Internet bubble in the late 1990’s and early years of this century, we explore the possibility that higher moments of the returns distribution may be important in explaining security returns. Using a sample of option prices from 1996-2005, we estimate individual securities’ volatility, skewness and kurtosis using the method of Bakshi, Kapadia and Madan(2003). We find that higher moments are strongly related to returns, even after controlling for differences in size and book-to-market.