We develop a one-period model of investor asset holdings where investors have heterogeneous preference for skewness. Introducing heterogeneous preference for skewness allows the model's investors, in equilibrium, to underdiversify. We find support for our model's three key implications using a...

We test the prediction of recent theories that stocks with high idiosyncratic skewness should have low expected returns. Because lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables....