Macroeconomic Risk and Higher Moments Risk Premia
45 Pages Posted: 16 Oct 2019 Last revised: 19 Nov 2019
Date Written: October 6, 2019
In this paper I investigate whether the risk premia associated with higher moments of stock returns such as variance, skewness and kurtosis bear compensation for macroeconomic risk. I introduce a new measure for kurtosis risk premia and show that the higher moment risk premia are related to macroeconomic risk. The results suggest that higher moment risk premia hegdes against macroeconomic risks, but the relationship appears to be asymmetric. Unlike previous studies, I find evidence that there is a difference between variance and skewness risk premia and that the variation in higher moment risk premia can be explained by two common factors. While the first factor is related to risk aversion and market risk, the second factor may be related to ability of market to absorb liquidity shocks. The paper concludes that risk aversion explanation is not enough alone to explain the variation in higher moment risk premia and that the size of the premia may be related to ability of the market to absorb liquidity shocks.
Keywords: Higher moments, Derivatives, Macroeconomic variables, PCA
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation