Decomposed Higher-Moment Risk Premiums and Market Return Predictability

49 Pages Posted: 18 Feb 2021 Last revised: 9 Apr 2021

See all articles by Julian Dörries

Julian Dörries

University of Goettingen (Göttingen)

Date Written: April 09, 2021

Abstract

In an empirical study of Standard & Poor's 500 index options, this paper analyses the predictability of future market excess returns by means of decomposed higher-moment risk premiums. The study proposes a new measure of kurtosis risk premium and suggests a decomposition of higher-moment risk premiums up to the fourth moment into downside and upside premiums. Thereby, the paper enhances the understanding of higher-moment risk premiums. The decomposition uncovers valuable information for return forecasts, as decomposed higher-moment risk premiums deliver improved in-sample predictions. In an out-of-sample study, the predictive power of decomposed higher-moment risk premiums is shown to be particularly driven by downside higher-moment risk premiums.

Keywords: Moment risk premiums; Kurtosis risk premium; Decomposition; Downside and upside; Predictive regressions

JEL Classification: G10, G12, G13, G17

Suggested Citation

Dörries, Julian, Decomposed Higher-Moment Risk Premiums and Market Return Predictability (April 09, 2021). Available at SSRN: https://ssrn.com/abstract=3784496 or http://dx.doi.org/10.2139/ssrn.3784496

Julian Dörries (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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