FORECASTING CRASHES: TRADING VOLUME, PAST RETURNS AND CONDITIONAL SKEWNESS IN STOCK PRICES
Joseph Chen
Harrison Hong
Jeremy C. Stein
Working Paper 7687
http://www.nber.org/papers/w7687
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
May 2000
ABSTRACT
This paper is an investigation into the determinants of asymmetries in stock returns. We
develop a series of cross-sectional regression specifications which attempt to forecast skewness in
the daily returns of individual stocks. Negative skewness is most pronounced in stocks that have
experienced: 1) an increase in trading volume relative to trend over the prior six months; and 2)
positive returns over the prior thirty-six months. The first finding is consistent with the model of
Hong and Stein (1999), which predicts that negative asymmetries are more likely to occur when there
are large differences of opinion among investors. The latter finding fits with a number of theories,
most notably Blanchard and Watson’s (1982) rendition of stock-price bubbles. Analogous results
also obtain when we attempt to forecast the skewness of the aggregate stock market, though our
statistical power in this case is limited.