The world predictive power of U.S. equity market skewness risk

• Main Authors: CHEN, Jian, JIANG, Fuwei, XUE, Shuyu, YAO, Jiaquan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: International stock markets; Market crash; Return predictability; Skewness risk; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6323; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7322/viewcontent/1_s20_S0261560619302694_main.pdf
• Institution: Singapore Management University

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).