Skewed to lose? Idiosyncratic Return Asymmetry in the Swedish Equity Market

Sammanfattning

This paper examines whether and how idiosyncratic return asymmetry is priced in the Swedish equity market. The question is motivated by mixed prior evidence, which may reflect differences in how asymmetry is measured as well as the possibility that any asymmetry premium is conditional rather than uniform across markets and firms. Using the density-based measure of residual asymmetry (RA) developed by Chen and Liu (2024), the paper tests whether stocks with greater upside asymmetry earn lower future returns in Sweden. It further examines whether this measure contains information beyond conventional skewness- and lottery-based proxies and whether the effect is stronger where arbitrage is more constrained. The results show a negative relation between RA and subsequent stock returns. A central finding is that the effect is concentrated in small growth stocks. In the full sample, the relation also becomes more visible when liquidity is poor, arbitrage costs are high, and when broader macro and sentiment conditions are more uncertain. Conventional idiosyncratic skewness adds little once RA is included, suggesting that the density-based measure captures distributional information not reflected in third moment skewness. A trading-cost analysis further shows that gross return spreads are positive, but net returns turn negative once implementation costs are applied. These results are more consistent with a limits-to-arbitrage interpretation than with a broad asymmetry risk-premium explanation. Overall, the results suggest that asymmetry is priced in a smaller European market, but in a way that is more conditional, more friction-sensitive, and less easily tradable than the strongest U.S. evidence would imply.