@article{d505e76fbb684173adb16cddf3ede376,
title = "Out-of-sample stock return prediction using higher-order moments",
abstract = "We analyze variance, skewness and kurtosis risk premia and their option-implied and realized components as predictors of excess market returns and of the cross-section of stock returns. We find that the variance risk premium is the only moment-based variable to predict S&P 500 index excess returns, with a monthly out-of-sample R2 above 6% for the period between 2001 and 2014. Nonetheless, all aggregate moment-based variables are effective in predicting the cross-section of stock returns. Self-financed portfolios long on the stocks least exposed to the aggregate moment-based variable and short on the stocks most exposed to it achieve positive and significant Carhart 4-factor alphas and a considerably higher Sharpe ratio than the S&P 500 index, with positive skewness.",
keywords = "Cross-section, Implied moments, Prediction, Realized moments, Time-series",
author = "Faias, {Jos{\'e} Afonso} and Tiago Castel-Branco",
note = "Funding Information: We thank the editor and the referee for valuable comments that significantly improved the paper. We would like to thank the participants at the 2015 Research in Options in Rio de Janeiro and the 2016 Multinational Finance Society Annual Meeting in Stockholm. We are grateful to Mariana Falc{\~a}o for excellent research assistance. This research was funded by grants UID/GES/00407/2013, PTDC/IIM-FIN/2977/2014 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. Funding Information: We thank the editor and the referee for valuable comments that significantly improved the paper. We would like to thank the participants at the 2015 Research in Options in Rio de Janeiro and the 2016 Multinational Finance Society Annual Meeting in Stockholm. We are grateful to Mariana Falcao for excellent research assistance. This research was funded by grants UID/GES/00407/2013, PTDC/IIMFIN/ 2977/2014 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. Publisher Copyright: {\textcopyright} 2018 World Scientific Publishing Company.",
year = "2018",
month = sep,
day = "1",
doi = "10.1142/S0219024918500437",
language = "English",
volume = "21",
journal = "International Journal of Theoretical and Applied Finance",
issn = "0219-0249",
publisher = "World Scientific Publishing Co. Pte Ltd",
number = "6",
}