Skewness as a Hidden Driver of Anomaly Returns

Behavioral finance research has established that investors dislike negative skewness because it exposes them to rare but severe losses, while they embrace positive skewness because it offers the chance of occasional outsized gains — the lottery-like appeal that persists even when expected payoffs are modest. In behavioral models, this preference for positively skewed assets bids up their prices, depressing future expected returns. Conversely, negatively skewed assets must offer higher expected returns to attract capital.

Rui Gong, John Lynch, and Richard Ogden, authors of the June 2026 study, “Skewness Managed Portfolios,” make a simple but powerful point: many well-known stock-market anomalies owe a surprising amount of their performance to a small set of stocks with extreme positive returns. The authors ask two questions. First, do these outlier stocks materially shape the returns of popular long-short strategies? Second, can investors improve those strategies by explicitly managing for skewness rather than ignoring it?

Their answer is yes on both counts. The paper shows that many anomaly portfolios are not just exposed to familiar factors like value, profitability, or investment; they are also implicitly exposed to return asymmetry — especially the kind created by rare but very large upside moves in individual stocks.

What They Examined

You can read the rest of my Alpha Architect article here.