Conditional skewness of stock market returns in developed and emerging markets and its economic fundamentals

We use a quantile-based measure of conditional skewness (or asymmetry) that is robust to outliers and therefore particularly suited for recalcitrant series such as emerging market returns. Our study is on the following portfolio returns: developed markets, emerging markets, the world, and separately 73 countries. We find that the conditional asymmetry of returns varies significantly over time, even after accounting for conditional volatility and unconditional skewness effects. Interestingly, the correlation of conditional asymmetry between developed and emerging markets is surprisingly low, despite the fact that their return co-movement has been historically high and increasing. We also document a strong relationship between conditional asymmetry and macroeconomic fundamentals. Moreover, the low correlation across developed and emerging markets can largely be explained by their opposite response to those fundamentals. The economic significance of conditional skewness is demonstrated in an international portfolio setting. Tilting the portfolio weights away from a value-weighted allocation and toward emerging markets produces significant portfolio gains. Skewness, Developed Markets, Emerging Markets, Quantile estimation, MIDAS