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

Riccardo Colacito, Eric Ghysels, Jinghan Meng and Wasin Siwasarit

The Review of Financial Studies, 2016, vol. 29, issue 8, 2069-2109

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

Date: 2016
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