The information content of forward moments

Andreou, P; Kagkadis, A; Philip, D; Taamouti, A

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.

Citation

Andreou, P., Kagkadis, A., Philip, D., & Taamouti, A. (2019). The information content of forward moments. Journal of Banking and Finance, 106, 527-541. https://doi.org/10.1016/j.jbankfin.2019.07.021

• Journal Article Type: Article
• Acceptance Date: Jul 29, 2019
• Online Publication Date: Aug 1, 2019
• Publication Date: Sep 30, 2019
• Deposit Date: Jul 30, 2019
• Publicly Available Date: Feb 1, 2021
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 106
• Pages: 527-541
• DOI: https://doi.org/10.1016/j.jbankfin.2019.07.021
• Public URL: https://durham-repository.worktribe.com/output/1326309
• Publisher URL: https://www.sciencedirect.com/journal/journal-of-banking-and-finance/issues