The Information Content of Forward Moments

56 Pages Posted: 6 Mar 2017 Last revised: 4 Aug 2019

See all articles by Panayiotis C. Andreou

Panayiotis C. Andreou

Cyprus University of Technology

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance

Dennis Philip

Durham University - Department of Economics and Finance

Abderrahim Taamouti

Durham University

Date Written: July 19, 2019

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

JEL Classification: G10; G11; G12

Suggested Citation

Andreou, Panayiotis C. and Kagkadis, Anastasios and Philip, Dennis and Taamouti, Abderrahim, The Information Content of Forward Moments (July 19, 2019). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2927454 or http://dx.doi.org/10.2139/ssrn.2927454

Panayiotis C. Andreou

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Dennis Philip (Contact Author)

Durham University - Department of Economics and Finance ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Abderrahim Taamouti

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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