Volatility Shocks, the Leverage Effect, and Time-Varying Conditional Skewness

If high-frequency stock returns display a leverage effect, then lower-frequency stock returns will generally display negative skewness. In addition, the conditional skewness of lower-frequency returns will depend on their conditional correlation with volatility shocks for the same time horizon. I use a new approach for constructing skewed distributions to model the dynamics of conditional skewness for daily and monthly portfolio returns. The analysis produces substantial support for the hypothesis that the conditional correlation between volatility shocks and contemporaneous returns explains the dynamics of conditional skewness. Furthermore, the proposed class of skewed distributions appears to be well suited to many applications