The world predictive power of U.S. equity market skewness risk. (September 2019) - Chen, Jian
Highlights: The skewness risk of US equity market significantly predicts the excess returns on international stock markets. A decrease in US equity market skewness predicts higher future international stock returns. A large proportion of international equity risk premium is driven by the US equity market skewness risk. The skewness risk of US equity market is related to business cycle and bad states of international market conditions. Abstract: This study investigates the cross-country impact of U.S. equity market skewness risk. We find that a large decrease in the U.S. market skewness significantly predicts higher future returns on international equity markets. The predictability remains significant after controlling for a set of U.S. and local forecasting variables. Furthermore, we find strong predictability in- an out-of-sample setting and the predictability delivers a large economic value. The U.S. market skewness also forecasts U.S. economic recessions and international market conditions, consistent with the international three-moment capital asset pricing model (three-moment CAPM) and the intertemporal capital asset pricing model (ICAPM).