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

56 Pages Posted: 6 Dec 2012 Last revised: 22 Aug 2015

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Jinghan Meng

University of Hong Kong

Wasin Siwasarit

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: August 22, 2015

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.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2587412

Keywords: Skewness, Consumption, Macro-Finance, Recursive Preferences

JEL Classification: C22, C58, G12

Suggested Citation

Colacito, Riccardo and Ghysels, Eric and Meng, Jinghan and Siwasarit, Wasin, Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory (August 22, 2015). Available at SSRN: https://ssrn.com/abstract=2185659 or http://dx.doi.org/10.2139/ssrn.2185659

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.unc.edu/~colacitr

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

Jinghan Meng

University of Hong Kong ( email )

Room 1001, 10/F
K.K. Leung Building
Pokfulam
Hong Kong
22194176 (Phone)

Wasin Siwasarit

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Department of Economics CB 3305
Chapel Hill, NC 27599
United States
919-966-2383 (Phone)
919-966-4986 (Fax)

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