City Research Online

Abstract

We study the predictive power of option-implied moment risk premia embedded in the conventional variance risk premium. We find that although the second-moment risk premium predicts market returns in short horizons with positive coefficients, the third-moment (fourth-moment) risk premium predicts market returns in medium horizons with negative (positive) coefficients. Combining the higher-moment risk premia with the second-moment risk premium improves the stock return predictability over multiple horizons, both in sample and out of sample. The finding is economically significant in an asset-allocation exercise and survives a series of robustness checks.

Publication Type:	Article
Additional Information:	This article has been published in a revised form in Journal of Financial and Quantitative Analysis https://doi.org/10.1017/S002210902000085X. This version is free to view and download for private research and study only. Not for re-distribution or re-use. © copyright holder.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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