The information content of forward moments

Panayiotis C. Andreou, Anastasios Kagkadis, Dennis Philip and Abderrahim Taamouti

Journal of Banking & Finance, 2019, vol. 106, issue C, 527-541

Abstract: We estimate the term structures of risk-neutral forward variance and skewness, and examine their predictive power for equity market excess returns and variance. We use Partial Least Squares to extract a single predictive factor from each term structure that is motivated by the theoretical implications of affine no-arbitrage models. The empirical analysis shows that an increased forward variance factor, FVF (forward skewness factor, FSF) corresponds to a more negatively sloped forward variance (more U-shaped forward skewness) term structure, and significantly forecasts higher future market excess returns and variance. More importantly, FSF exhibits predictive power for market returns that is stronger than, and incremental to, that provided by FVF. However, it does not outperform FVF in terms of excess variance predictability.

Keywords: Forward moments; Implied volatility surface; Partial least squares; Predictability of stock returns; Equity premium; Variance premium (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:106:y:2019:i:c:p:527-541

DOI: 10.1016/j.jbankfin.2019.07.021

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