PT - JOURNAL ARTICLE AU - Xiang Gao AU - Kees G. Koedijk AU - Zhan Wang TI - Volatility-Dependent Skewness Preference AID - 10.3905/jpm.2021.1.295 DP - 2021 Oct 31 TA - The Journal of Portfolio Management PG - 43--58 VI - 48 IP - 1 4099 - https://pm-research.com/content/48/1/43.short 4100 - https://pm-research.com/content/48/1/43.full AB - 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–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.