Higher-Moment Risk

69 Pages Posted: 15 Nov 2017 Last revised: 20 Jun 2022

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Christian Skov Jensen

Bocconi University

Date Written: June 17, 2022

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, with good and bad times defined as periods with a low and high volatility of the stock market. This variation in the shape of the distribution is inconsistent with leading disaster-based explanations of the equity premium, it induces pro-cyclical variation in the riskiness of volatility-managed portfolios, and it causes the normal distribution to underestimate tail risk more during periods with low volatility.

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 (June 17, 2022). 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
Italy

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