The Review of Asset Pricing Studies Vol. 12 No. 3 2022

Equity Risk Premium Predictability from Cross-Sectoral Downturns

José Afonso Faias¹; Juan Arismendi Zambrano²

¹ Universidade Católica Portuguesa, Católica Lisbon School of Business and Economics , Portugal · ² University College of Dublin School of Business , Ireland

Abstract

We illustrate the role of left tail dependence—left tail mean (LTM)—in equity risk premium (ERP) predictability. LTM measures the average of pairwise left tail dependency among major equity sectors incorporating shocks imperceptible at the aggregate level. LTM, as well as the variance risk premium, significantly predicts the ERP in and out of sample, which is not the case with commonly used predictors. We find this predictability is the result of procyclical shocks’ reversals in a stable business cycle. This paper contributes to the ongoing debate on ERP predictability.

DOI

10.1093/rapstu/raac001

Volume

12

Issue

3

Pages

808-842

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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