Asymmetry in asset returns is a puzzling phenomenon and causes different investor behavior. Some show a preference for stocks with significant right skew, which, like playing the lottery, hit the jackpot every now and then and offer outsized returns. Other investors try to get away from this volatility and opt for stocks that have no skew or even show skew to the left.
But how does the asymmetry of returns relate to other factors in asset prices? Could investors bet on particular factors precisely because they want a lottery-like skew in their returns?
To answer these questions, we constructed cross-sectional growth and value portfolios and examined the distribution of monthly returns over five-year periods. Based on an investor universe of all stocks traded on the NYSE and NASDAQ since 1975, we created our growth and value portfolios from the quintile of stocks with the highest and lowest P/E ratios, respectively.
Our growth portfolio showed more appropriate skew in its returns, on average, than our value portfolio. This was true for 6 of the 10 time periods.
Growth stocks: monthly returns
| To mean | average | volatility | Ses | |
| 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 |
| 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 |
Stock value: monthly returns
| To mean | average | volatility | Ses | |
| 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% | 9.30 |
| average | 1.49% | 0.43% | 47.13% | 5.10 |
So what can we take from these results? Our theory is that asymmetry tends to move based on investor preferences. That is, when a particular factor is trending, the session increases significantly while it is trending. For example, growth stocks were all the rage when the dot-com bubble inflated from 1995 to 2000, and they demonstrated significant skewness, while value stocks showed a distinct lack of skewness.
Growth Stocks: Monthly Returns, 1995 to 2000
Growth skyrocketed in popularity again between 2010 and 2020, while Value underperformed and again showed a lack of sleepiness in returns.
Stock Value: Monthly Returns, 2010 to 2015
However, these results do not tell us in which direction the association goes, only that an association exists. The data suggest that when a particular asset pricing style is popular among investors, returns for that style show greater skewness.
In short, growth stock investors may be chasing lottery-like payouts, especially when these stocks are in style.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
Image credit: ©Getty Images/piotr_malczyk
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Derek Horstmeyer
Jordan Doyle
