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, 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