Higher-Moment Risk

Abstract

We study time variation in the shape of the distribution of stock returns. In a global
sample covering 17 countries, returns are more left skewed and fat tailed during good
times than during bad times. This pattern creates pro-cyclical variation in conditional
tail risk, which is the risk of losing several conditional standard deviations of returns.
The variation in higher-order moments is hard to reconcile with the idea that disaster
risk is elevated in bad times, which is otherwise a basic premise of leading disaster-based
asset pricing models.

Keywords: asset pricing, financial economics, higher order moments, tail risk

JEL Classification: G00, G1, G12, G13, G17