Monetary Policy Expectation Skewness and Stock Market Returns

55 Pages Posted: 29 Apr 2024

See all articles by Fuwei Jiang

Fuwei Jiang

Xiamen University

Yumin Liu

Central University of Finance and Economics (CUFE) - School of Finance

Jiasheng Yu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: April 23, 2024

Abstract

This paper investigates the impact of monetary policy expectation skewness (SKEW) on asset pricing. Positive (negative) SKEW signals upside (downside) interest rate risk. We find that SKEW positively predicts stock market returns in the US, both in-sample and out-of-sample. Additionally, it generates considerable economic value for mean-variance investors. SKEW is associated with extreme investor beliefs about interest rate changes, and its predictive power primarily operates through a cash flow channel. Moreover, we show that SKEW outperforms realized interest rate outcomes and interest rate expectations in predicting stock market returns.

Keywords: Monetary Policy Expectation; Interest Rate Skewness; Return Predictability; Investor Belief

JEL Classification: E4, G15

Suggested Citation

Jiang, Fuwei and Liu, Yumin and Yu, Jiasheng, Monetary Policy Expectation Skewness and Stock Market Returns (April 23, 2024). Available at SSRN: https://ssrn.com/abstract=4804086 or http://dx.doi.org/10.2139/ssrn.4804086

Fuwei Jiang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Yumin Liu

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Jiasheng Yu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Shahe Higher Education Park, Changping District
Beijing, 102206
China

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