Equity risk premium predictability from cross-sectoral downturns

José Afonso Faias; Juan Arismendi Zambrano

doi:10.1093/rapstu/raac001

Equity risk premium predictability from cross-sectoral downturns

José Afonso Faias, Juan Arismendi Zambrano

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Abstract

We illustrate the role of left tail dependence-left tail mean (LTM)-in equity risk premium (ERP) predictability. LTM measures the average of pairwise left tail dependency among major equity sectors incorporating shocks imperceptible at the aggregate level. LTM, as well as the variance risk premium, significantly predicts the ERP in and out of sample, which is not the case with commonly used predictors. We find this predictability is the result of procyclical shocks' reversals in a stable business cycle. This paper contributes to the ongoing debate on ERP predictability.

Original language	English
Pages (from-to)	808-842
Number of pages	35
Journal	Review of Asset Pricing Studies
Volume	12
Issue number	3
DOIs	https://doi.org/10.1093/rapstu/raac001
Publication status	Published - 1 Sept 2022

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10.1093/rapstu/raac001Licence: CC BY

47732382Final published version, 558 KBLicence: CC BY

http://hdl.handle.net/10400.14/38219Licence: CC BY

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abstract = "We illustrate the role of left tail dependence-left tail mean (LTM)-in equity risk premium (ERP) predictability. LTM measures the average of pairwise left tail dependency among major equity sectors incorporating shocks imperceptible at the aggregate level. LTM, as well as the variance risk premium, significantly predicts the ERP in and out of sample, which is not the case with commonly used predictors. We find this predictability is the result of procyclical shocks' reversals in a stable business cycle. This paper contributes to the ongoing debate on ERP predictability.",

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Equity risk premium predictability from cross-sectoral downturns

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CUBE: Católica Lisbon Research Unit in Business and Economics

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Equity risk premium predictability from cross-sectoral downturns

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