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

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-varyi...

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Bibliographic Details
Published inThe Review of financial studies Vol. 29; no. 8; pp. 2069 - 2109
Main Authors Colacito, Riccardo, Ghysels, Eric, Meng, Jinghan, Siwasarit, Wasin
Format Journal Article
LanguageEnglish
Published Oxford Oxford University Press 01.08.2016
Oxford Publishing Limited (England)
Subjects
Calibration
Consumption
Economic growth
Economic growth models
Equity
Forecasting models
GDP
Gross Domestic Product
Growth rate
Growth rates
Mathematical moments
Predictive modeling
Rates of return
Risk premiums
Skewed distribution
Statistical variance
Studies
Time series forecasting
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Summary: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.
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ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhw009