The information content of forward moments

Andreou, Panayiotis C. and Kagkadis, Anastasios and Philip, Dennis and Taamouti, Abderrahim (2019) The information content of forward moments. Journal of Banking and Finance, 106. pp. 527-541. ISSN 0378-4266

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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.

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Journal Article
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Journal of Banking and Finance
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This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 106, 2019 DOI: 10.1016/j.bankfin.2019.07.021
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15 Aug 2019 09:20
Last Modified:
11 May 2022 06:37