On the Surprising Explanatory Power of Higher Realized Moments in Practice

Abstract: Realized moments of higher order computed from intraday returns are introduced in recent years. The literature indicates that realized skewness is an important factor in explaining future asset returns. However, the literature mainly focuses on the whole market and on the monthly or weekly scale. In this paper, we conduct an extensive empirical analysis to investigate the forecasting abilities of realized skewness and realized kurtosis towards individual stock's future return and variance in the daily scale. It is found that realized kurtosis possesses significant forecasting power for the stock's future variance. In the meanwhile, realized skewness is lack of explanatory power for the future daily return for individual stocks with a short horizon, in contrast with the existing literature.