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Coskewness Risk Decomposition, Covariation Risk, and Intertemporal Asset Pricing

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  • Kalev, Petko S.
  • Saxena, Konark
  • Zolotoy, Leon

Abstract

We develop an intertemporal asset pricing model where cash-flow news, discount-rate news, and their second moments are priced by the market. This model generalizes the market-return decomposition framework, showing that intertemporal considerations imply a decomposition of squared market returns (coskewness risk). Our model accounts for 68% of the return variation across portfolios sorted by size, book-to-market ratio, momentum, investment, and profitability for a modern U.S. sample period. Further, our findings highlight the importance of covariation risk, that is, the risk of simultaneous unfavorable shocks to cash flows and discount rates, in understanding equity risk premia.

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  • Kalev, Petko S. & Saxena, Konark & Zolotoy, Leon, 2019. "Coskewness Risk Decomposition, Covariation Risk, and Intertemporal Asset Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(1), pages 335-368, February.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:01:p:335-368_00
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    Cited by:

    1. Mohammadreza Tavakoli Baghdadabad & Girijasankar Mallik, 2021. "Market news co-moments and currency returns," Empirical Economics, Springer, vol. 61(4), pages 1819-1863, October.
    2. Chenglu Jin & Thomas Conlon & John Cotter, 2023. "Co-Skewness across Return Horizons," Journal of Financial Econometrics, Oxford University Press, vol. 21(5), pages 1483-1518.

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