@article {Gaojpm.2021.1.295, author = {Xiang Gao and Kees G. Koedijk and Zhan Wang}, title = {Volatility-Dependent Skewness Preference}, elocation-id = {jpm.2021.1.295}, year = {2021}, doi = {10.3905/jpm.2021.1.295}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In this article, the authors propose a variance-dependent explanation for the contradiction between skewness preference and low expected return concerning lottery stocks. They emphasize an overlooked aspect of skewness as a risk measure: the return uncertainty of extreme events. They show that, during periods of low market volatility, investors dislike large-skewness securities owing to a fear of uncertain results. Thus, one observes a positive relation between skewness and expected return because the security is currently undervalued. Conversely, negative associations occur in high-volatility environments. This conditional skewness{\textendash}return nexus is demonstrated to possess return predictability and can help in adjusting portfolios with profitable buying and selling decisions.Key Findings▪ The authors propose variance-dependent skewness to reconcile the skewness preference for lottery stocks with their actual low expected returns.▪ They emphasize skewness as a risk measure of the return uncertainty of extreme events.▪ The authors construct portfolios based on the return predictability of skewness conditional on volatility and show that these portfolios remain profitable after considering transaction costs and restrictions on short sales.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/early/2021/10/05/jpm.2021.1.295}, eprint = {https://jpm.pm-research.com/content/early/2021/10/05/jpm.2021.1.295.full.pdf}, journal = {The Journal of Portfolio Management} }