Cross-Asset Skew

The authors find that realized skewness is a pervasive negative predictor of returns across commodities, government bonds, equity indexes, and currencies, hence providing supporting evidence that investors exhibit skewness preferences. Portfolios in these asset classes with long positions on the most negatively (or least positively) skewed assets and short positions on the least negatively (or most positively) skewed assets generate on average a Sharpe ratio of 0.36 between 1990 and 2017. The authors find little evidence of a common risk driver, with a cross-asset skewness portfolio delivering a Sharpe ratio of 0.73. The patterns are not driven by reversal dynamics and are not subsumed by value, momentum, or carry factors or other macroeconomic and liquidity risks; consequently, mean–variance efficient multifactor portfolios assign a positive weight to skewness-based market-neutral portfolios. Their results remain robust to different measures of skewness and across subsamples.