Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory

Colacito, Riccardo; Ghysels, Éric; Meng, J. Ginger; Siwasarit, Wasin

doi:10.2139/ssrn.2185659

Cited by 28 publications

(22 citation statements)

References 55 publications

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“…in Colacito, Ghysels, and Meng (2013). One can also enrich the model by separating volatility and jump risk factors, consistent with the findings in Santa-Clara and Yan (2010), and incorporating additional volatility-related factors, such as the long-run volatility (see Duffie, Pan, and Singleton (2000)), or volatility of volatility (see Bollerslev, Tauchen, and Zhou (2009)).…”

mentioning

confidence: 52%

Good and Bad Variance Premia and Expected Returns

Kilic

Shaliastovich

2017

SSRN Journal

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We measure "good" and "bad" variance premia that capture risk compensations for the realized variation in positive and negative market returns, respectively. The two variance premium components jointly predict excess returns over the next 1 and 2 years with statistically significant negative (positive) coefficients on the good (bad) component. The R 2 s reach about 10% for aggregate equity and portfolio returns and 20% for corporate bond returns. To explain the new empirical evidence, we develop an economic model which underscores the difference in investors' risk attitudes towards upside and downside uncertainty risks AbstractWe measure "good" and "bad" variance premia that capture risk compensations for the realized variation in positive and negative market returns, respectively. The two variance premium components jointly predict excess returns over the next 1 and 2 years with statistically significant negative (positive) coefficients on the good (bad) component. The R 2 s reach about 10% for aggregate equity and portfolio returns and about 20% for corporate bond returns. We show that an asset pricing model that features distinct time variation in positive and negative shocks to fundamentals can explain the good and bad variance premium evidence in the data.

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confidence: 52%

Good and Bad Variance Premia and Expected Returns

Kilic

Shaliastovich

2017

SSRN Journal

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“…The time-varying shape parameters governing the Gamma distribution drive the variance and higher-order moments of consumption growth distribution. An alternative approach for generating time variation in higher-order moments is given in Colacito et al (2013). They model shocks to expected consumption as drawn from a skew-normal distribution with time-varying parameters and a separate process for stochastic volatility which leads to separate movements in consumption volatility and skewness.…”

Section: Consumption Dynamicsmentioning

confidence: 99%

“…In another specification, which again can be accommodated within our framework, the cash flow shocks are drawn from a Gamma distribution with a time-varying shape parameter, in which case the consumption shock dynamics follow the good and bad environment specification in Bekaert and Engstrom (2009). Finally, an alternative approach for generating time variation in higher-order moments is provided in Colacito et al (2013). They model shocks to expected consumption as drawn from a skew-normal distribution with time-varying parameters and allow for a separate process for stochastic volatility.…”

Section: Introductionmentioning

confidence: 99%

Good and bad uncertainty: Macroeconomic and financial market implications

Segal

Shaliastovich

Yaron

2015

Journal of Financial Economics

424

129

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Does macroeconomic uncertainty increase or decrease aggregate growth and asset prices? To address this question, we decompose aggregate uncertainty into 'good' and 'bad' volatility components, associated with positive and negative innovations to macroeconomic growth. We document that in line with our theoretical framework, these two uncertainties have opposite impact on aggregate growth and asset prices. Good uncertainty predicts an increase in future economic activity, such as consumption, output, and investment, and is positively related to valuation ratios, while bad uncertainty forecasts a decline in economic growth and depresses asset prices. Further, the market price of risk and equity beta of good uncertainty are positive, while negative for bad uncertainty. Hence, both uncertainty risks contribute positively to risk premia, and help explain the cross-section of expected returns beyond cash flow risk.

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“…Several recent papers argue that proxies for disaster risk predict future returns (Kelly and Jiang (2014), Manela and Moreira (2013)). Colacito, Ghysels, and Meng (2013) shows that skewness in analysts forecasts, which takes on both negative and positive values, predicts returns with a negative sign. Like other papers on disaster risk, this paper predicts that a greater risk of disaster should be associated with a higher equity premium.…”

Section: Skewness In the Time Series And Cross-sectionmentioning

confidence: 99%

Rare Booms and Disasters in a Multi-Sector Endowment Economy

Tsai

Wachter

2012

SSRN Journal

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Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns. Rare booms and disasters in a multi-sector endowment economy AbstractWhy do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market.The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns.

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Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory

Cited by 28 publications

References 55 publications

Good and Bad Variance Premia and Expected Returns

Good and Bad Variance Premia and Expected Returns

Good and bad uncertainty: Macroeconomic and financial market implications

Rare Booms and Disasters in a Multi-Sector Endowment Economy

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