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

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  • Riccardo Colacito
  • Eric Ghysels
  • Jinghan Meng
  • Wasin Siwasarit

Abstract

We document that the first and third cross-sectional moments of the distribution of GDP growth rates made by professional forecasters can predict equity excess returns, a finding that is robust to controlling for a large set of well-established predictive factors. We show that introducing time-varying skewness in the distribution of expected growth prospects in an otherwise standard endowment economy can substantially increase the model-implied equity Sharpe ratios, and produce a large amount of fluctuation in equity risk premiums. Received May 6, 2013; accepted January 26, 2016 by Editor Geert Bekaert.

Suggested Citation

  • Riccardo Colacito & Eric Ghysels & Jinghan Meng & Wasin Siwasarit, 2016. "Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2069-2109.
  • Handle: RePEc:oup:rfinst:v:29:y:2016:i:8:p:2069-2109.
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    References listed on IDEAS

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    Cited by:

    1. Davide Pettenuzzo & Zhiyuan Pan & Yudong Wang, 2017. "Forecasting Stock Returns: A Predictor-Constrained Approach," Working Papers 116R, Brandeis University, Department of Economics and International Businesss School.

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