Review of Financial Studies Vol. 29 No. 8 2016
Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory
Abstract
We document that the first and third cross-sectional moments of the distribution of GDP growth rates made by professional forecasters can predict equity excess returns, a finding that is robust to controlling for a large set of well-established predictive factors. We show that introducing time-varying skewness in the distribution of expected growth prospects in an otherwise standard endowment economy can substantially increase the model-implied equity Sharpe ratios, and produce a large amount of fluctuation in equity risk premiums.
- Volume
- 29
- Issue
- 8
- Pages
- 2069-2109
- Sources
- bibtex:phds-export.bib