Monthly Pattern and Portfolio Effect on Higher Moments of Stock Returns: Empirical Evidence from Hong Kong |
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Authors: | Gordon YN Tang |
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Institution: | (1) Department of Finance and Decision Sciences, Hong Kong Baptist University, Kowloon Tong, Kowloon, Hong Kong |
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Abstract: | Using a direct test, this paper studies the month-of-the-year effect on the higher moments of six industrial stock indices
of the Hong Kong market. We also examine the portfolio effect on skewness and kurtosis across month of the year to see if
such an anomaly exists. The empirical results support a weak month-of-the-year effect in higher moments of stock returns.
Using a complete sample of all possible combinations for each portfolio size, we show that portfolio effect varies across
month of the year for both skewness and kurtosis. In particular, our results show that diversification does not necessarily
provide benefits to rational investors when the stock return distribution is non-normal, even though portfolio formation can
reduce standard deviation. In June, August and October, diversification across industrial sectors results in a more negatively
skewed and leptokurtic return distribution, which is not preferred by investors with risk-aversion. Two (one) possible explanations
for the portfolio effect on skewness (kurtosis) are also provided. Our empirical results add new evidence to the existence
of anomalies in the Hong Kong stock market.
This revised version was published online in August 2006 with corrections to the Cover Date. |
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Keywords: | higher moments Hong Kong monthly pattern portfolio effect |
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