Impact of Non-Normality of Returns on the Informational Efficiency of Stock Prices

Abstract

Equity returns are typically assumed to be drawn from a normal distribution. However, empirical research suggests that this assumption does not generally hold true. Such deviations from normality allow investors to either prefer or avoid higher moments, which can lead to potential inefficiency in stock prices. This study extends the literature by testing whether deviations from normality inhibit the efficiency of stock prices. We find that both positive and negative skewness impedes price efficiency. We also find that excess kurtosis is associated with informationally inefficient prices. (G11, G12, G14)