Higher-Moment Risk

52 Pages Posted: 15 Nov 2017 Last revised: 26 Mar 2019

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Christian Skov Jensen

Bocconi University

Date Written: November 30, 2018


We estimate and analyze the ex ante higher order moments of stock market returns. We document that even and odd higher-order moments are strongly negatively correlated, creating periods where the return distribution is riskier because it is more left-skewed and fat tailed. Such higher-moment risk is negatively correlated with variance and past returns, meaning that it peaks during calm periods. The variation in higher-moment risk is large and causes the probability of a two-sigma loss on the market portfolio to vary from 3.3% to 11% percent over the sample, peaking in calm periods such as just before the onset of the financial crisis. In addition, we argue that an increase in higher- moment risk works as an "uncertainty shock" that deters firms from investing. Consistent with this argument, more higher-moment risk predicts lower future industrial production.

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

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

Suggested Citation

Gormsen, Niels Joachim and Jensen, Christian Skov, Higher-Moment Risk (November 30, 2018). Available at SSRN: https://ssrn.com/abstract=3069617 or http://dx.doi.org/10.2139/ssrn.3069617

Niels Joachim Gormsen

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Christian Skov Jensen (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136

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