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Market-Based Solutions to Vital Economic Issues
Research
Aug 1, 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 which 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 premia.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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