Coskewness Risk Decomposition, Covariation Risk, and Intertemporal Asset Pricing

Posted: 11 Sep 2017 Last revised: 31 Jan 2019

See all articles by Petko S. Kalev

Petko S. Kalev

La Trobe Business School

Konark Saxena

University of New South Wales

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: June 24, 2017

Abstract

We develop an intertemporal asset pricing model where cash flow news, discount rate news, and their second moments are priced by the market. This model generalizes the market return decomposition framework, showing that intertemporal considerations imply a decomposition of squared market returns (coskewness risk). Our model accounts for 68% of the return variation across size-, book-to-market–, momentum-, investment-, and profitability-sorted portfolios for a modern U.S. sample period. Further, our findings highlight the importance of covariation risk, that is, the risk of simultaneous unfavorable shocks to cash flows and discount rates, in understanding equity risk premia.

Keywords: Asset pricing; coskewness risk; cash flow news; discount rate news; covariation risk

JEL Classification: G12; G14

Suggested Citation

Kalev, Petko S. and Saxena, Konark and Zolotoy, Leon, Coskewness Risk Decomposition, Covariation Risk, and Intertemporal Asset Pricing (June 24, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3033370

Petko S. Kalev

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Konark Saxena (Contact Author)

University of New South Wales ( email )

School of Banking and Finance
Australian School of Business
Sydney, NSW 2052
Australia

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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