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Moment Risk Premia and Stock Return Predictability

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  • Fan, Zhenzhen
  • Xiao, Xiao
  • Zhou, Hao

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.

Suggested Citation

  • Fan, Zhenzhen & Xiao, Xiao & Zhou, Hao, 2022. "Moment Risk Premia and Stock Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(1), pages 67-93, February.
    • Handle: RePEc:cup:jfinqa:v:57:y:2022:i:1:p:67-93_3
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