Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory

Riccardo Colacito; Eric Ghysels; Jinghan Meng; Wasin Siwasarit

doi:10.1093/rfs/hhw009

← Search

Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory

Riccardo Colacito¹; Eric Ghysels; Jinghan Meng²; Wasin Siwasarit³

¹ University of North Carolina at Chapel Hill · ² University of Hong Kong · ³ Thammasat University

Review of Financial Studies 2016 open access

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. Received May 6, 2013; accepted January 26, 2016 by Editor Geert Bekaert.

DOI: 10.1093/rfs/hhw009
Volume: 29 (8)
Pages: 2069-2109
Language: en
Export: BibTeX
Sources: openalex crossref