The Impact of Market Return Skewness on Individual Stock and Government Bonds: Evidence from Sri Lanka

Purpose: This study investigates whether individual stocks provide higher market returns than government bonds in Sri Lanka by examining the role of return skewness and long-run dynamics.
Design/ Methodology/ Approach: The study accompanies monthly data from January 2008 to March 2024. Skewness and Autoregressive Distributed Lag model was incorporated to analyse the data using the STATA software.
Findings: The study reveals substantial differences between annual stock returns and bond yields align with the anticipated risk-return dynamics. Stock returns exhibit significantly higher positive skewness compared to bond yields signifying pronounced directional movements over time. The positive correlation between annual stock returns and skewness contrasts with the relatively minor impact of skewness on bond yields. Further, significant long-run and short-run linkages between skewness and asset returns of both markets, suggest that the distributional asymmetry of returns is economically relevant for asset performance and portfolio choice in Sri Lanka. Higher average stock returns in Sri Lanka are accompanied by pronounced skewness. Hence, skewness should be considered when assessing risk-return trade-offs and diversification strategies.
Originality: This study provides novel frontier-market evidence from Sri Lanka showing that individual stocks return significantly outperform government bonds returns and that positive return skewness is a key driver of the equity premium. By combining pooled regressions and ARDL analysis, it highlights the importance of higher-moment risk in explaining stock-bond return differentials.