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The information content of forward moments.

Andreou, P. and Kagkadis, A . and Philip, D. and Taamouti, A. (2019) 'The information content of forward moments.', Journal of banking and finance., 106 . pp. 527-541.

Abstract

We estimate the term structures of risk-neutral forward variance and skewness, and examine their predictive power for equity market excess returns and variance. We use Partial Least Squares to extract a single predictive factor from each term structure that is motivated by the theoretical implications of affine no-arbitrage models. The empirical analysis shows that an increased forward variance factor, FVF (forward skewness factor, FSF) corresponds to a more negatively sloped forward variance (more U-shaped forward skewness) term structure, and significantly forecasts higher future market excess returns and variance. More importantly, FSF exhibits predictive power for market returns that is stronger than, and incremental to, that provided by FVF. However, it does not outperform FVF in terms of excess variance predictability.

Item Type:Article
Full text:Publisher-imposed embargo until 01 February 2021.
(AM) Accepted Manuscript
First Live Deposit - 30 July 2019
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
File format - PDF
(577Kb)
Status:Peer-reviewed
Publisher Web site:https://www.sciencedirect.com/journal/journal-of-banking-and-finance/issues
Publisher statement:© 2019 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Record Created:30 Jul 2019 12:43
Last Modified:21 Aug 2019 10:08

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