Higher moments matter! Cross-sectional (higher) moments and the predictability of stock returns

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Reference

Stöckl, S., & Kaiser, L. (2017). Higher moments matter! Cross-sectional (higher) moments and the predictability of stock returns. University of Liechtenstein.

Publication type

Working Paper

Abstract

In this paper we investigate the predictive power of cross-sectional volatility, skewness and kurtosis for future stock returns. Adding to the work of Maio (2016), who finds cross-sectional volatility to forecast a decline in the equity premium with high predictive power in-sample as well as out-of-sample, we highlight the additional role of cross-sectional skewness and cross-sectional kurtosis. Applying a principal component approach, we show that cross-sectional higher moments add to the predictive quality of cross-sectional volatility by stabilizing the predictive performance and yielding a positive trend in in-sample and out-of-sample predictive quality since the burst of the dot-com bubble. In particular, we observe cross-sectional skewness to span the predictive quality of cross-sectional volatility over short-forecasting horizons, whereas cross-sectional kurtosis significantly contributes to long-horizon forecasting of 12 months and above. Results are both statistically and economically significant.

Research

Measures of cross-sectional dispersion in international stock returns
internes Projekt, June 2015 until June 2018

Time-series volatility is a long standing and well established measure of risk for both individual stocks and the market as such. However, the fact that volatility is time variant is not the sole set ... more ...

Persons

Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management
  • Chair in Finance