Semi-coskewnesses and the cross-section of excepted stock returns: Evidence from China

We propose an alternative nonlinear semi-risk measure, by decomposing the traditional coskewness into four components associated with the signed excess market and asset returns, that captures the asymmetries in nonlinear markets. We find that the two semi-coskewnesses attributable to (positive) negative excess market returns predict significantly (lower) higher future returns based on high-frequency data from China’s A-share market. After conducting a wide range of implementations, the risk premium for negative coskewness stands out as the most significant, followed by the premium for mixed negative coskewness. In contrast, the results for positive and mixed positive coskewnesses are not always significantly negative. More importantly from an economically meaningful perspective, for a downside risk premium of 25.40% per annum, a 2-standard-deviation increase in negative semi-coskewness gives rise to an increase of approximately 13.71% in annual expected return.