Skewness in Stock Returns:Reconciling the Evidence on Firm versus Aggregate Returns

Aggregate stock market returns display negative skewness. Firm-level stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This paper provides a unified theory that reconciles the two facts. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to negative skewness in aggregate returns. I provide evidence consistent with the model predictions.announcement events; crosssectional heterogeneity; firm returns; market returns; Skewness