Pub Date : 2025-09-13DOI: 10.1016/j.jempfin.2025.101645
Shan Chen , Tao Li
Two duration factors that arise from the downward-sloping term structure of equity returns explain the value, profitability, and investment premiums. One factor captures the spread of returns between short and long durations, and the other measures the difference in risk premiums associated with duration transitions. These duration effects jointly subsume the explanatory power of the value, profitability, and investment in the cross-section of equity returns. Our study shows that these three and other related anomalies can be unified in a risk-based framework. These anomalies may arise from the dynamic relations between firms’ durations and their fundamentals.
{"title":"A unified duration-based explanation of the value, profitability, and investment anomalies","authors":"Shan Chen , Tao Li","doi":"10.1016/j.jempfin.2025.101645","DOIUrl":"10.1016/j.jempfin.2025.101645","url":null,"abstract":"<div><div>Two duration factors that arise from the downward-sloping term structure of equity returns explain the value, profitability, and investment premiums. One factor captures the spread of returns between short and long durations, and the other measures the difference in risk premiums associated with duration transitions. These duration effects jointly subsume the explanatory power of the value, profitability, and investment in the cross-section of equity returns. Our study shows that these three and other related anomalies can be unified in a risk-based framework. These anomalies may arise from the dynamic relations between firms’ durations and their fundamentals.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"84 ","pages":"Article 101645"},"PeriodicalIF":2.4,"publicationDate":"2025-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145061350","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-10DOI: 10.1016/j.jempfin.2025.101650
Riccardo Rebonato , Ken Nyholm
We explain why the Cochrane–Piazzesi (CP) model, which uses a single tent-shaped linear combination of forward rates, is so effective at predicting bond excess returns. By using a novel statistical test coupled with a popular resampling technique, first we rule out the possibility that the high predictability may be an artefact of in-sample overfitting. Then we find that, contrary to explanations proposed in the original CP paper, neither the specific tent shape of the factor loadings nor the four-to-five-year yield spread are essential for the model’s predictive power. Instead, our analysis suggests that the predictive power of the CP model lies in its ability to identify the cointegration relationship among the quasi-unit-root forward rate regressors needed to produce the stationary process of excess returns. To support this interpretation we show that cointegration relationships among forward rates directly provide strong predictors of excess returns, and we propose that the cointegration modes of attraction generate at least part of the excess returns. Our findings shed new light on the source of bond return predictability captured by the CP factor and highlight the link between cointegration properties and the dynamics of yields.1
{"title":"Why does the Cochrane–Piazzesi model predict treasury returns?","authors":"Riccardo Rebonato , Ken Nyholm","doi":"10.1016/j.jempfin.2025.101650","DOIUrl":"10.1016/j.jempfin.2025.101650","url":null,"abstract":"<div><div>We explain why the Cochrane–Piazzesi (CP) model, which uses a single tent-shaped linear combination of forward rates, is so effective at predicting bond excess returns. By using a novel statistical test coupled with a popular resampling technique, first we rule out the possibility that the high predictability may be an artefact of in-sample overfitting. Then we find that, contrary to explanations proposed in the original CP paper, neither the specific tent shape of the factor loadings nor the four-to-five-year yield spread are essential for the model’s predictive power. Instead, our analysis suggests that the predictive power of the CP model lies in its ability to identify the cointegration relationship among the quasi-unit-root forward rate regressors needed to produce the stationary process of excess returns. To support this interpretation we show that cointegration relationships among forward rates directly provide strong predictors of excess returns, and we propose that the cointegration modes of attraction generate at least part of the excess returns. Our findings shed new light on the source of bond return predictability captured by the CP factor and highlight the link between cointegration properties and the dynamics of yields.<span><span><sup>1</sup></span></span></div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"84 ","pages":"Article 101650"},"PeriodicalIF":2.4,"publicationDate":"2025-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145097580","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-04DOI: 10.1016/j.jempfin.2025.101655
Ariel Gu , Hong Il Yoo
Since the exact probability distribution of asset returns is often unknown, the type of uncertainty affecting financial assets may be better characterized as ambiguity rather than risk. Using data from the U.S. mutual fund market, we examine the relationships between mutual funds’ ambiguity exposure, risk-adjusted performance, and investment flows. We introduce a novel measure of ambiguity exposure based on the smooth ambiguity model, which provides insight into how funds are priced in the presence of ambiguity. We find that risk-adjusted fund returns include a positive premium that compensates for greater ambiguity exposure in the fund’s asset holdings. The flow analysis, however, suggests that fund investors pursue positive risk-adjusted returns overall, regardless of whether seemingly superior returns are driven by the ambiguity premium. This behavior indicates that fund investors are primarily attracted to performance outcomes and less concerned with whether these reflect managerial expertise or increased ambiguity exposure.
{"title":"Mutual fund performance and flow-performance relationship under ambiguity","authors":"Ariel Gu , Hong Il Yoo","doi":"10.1016/j.jempfin.2025.101655","DOIUrl":"10.1016/j.jempfin.2025.101655","url":null,"abstract":"<div><div>Since the exact probability distribution of asset returns is often unknown, the type of uncertainty affecting financial assets may be better characterized as ambiguity rather than risk. Using data from the U.S. mutual fund market, we examine the relationships between mutual funds’ ambiguity exposure, risk-adjusted performance, and investment flows. We introduce a novel measure of ambiguity exposure based on the smooth ambiguity model, which provides insight into how funds are priced in the presence of ambiguity. We find that risk-adjusted fund returns include a positive premium that compensates for greater ambiguity exposure in the fund’s asset holdings. The flow analysis, however, suggests that fund investors pursue positive risk-adjusted returns overall, regardless of whether seemingly superior returns are driven by the ambiguity premium. This behavior indicates that fund investors are primarily attracted to performance outcomes and less concerned with whether these reflect managerial expertise or increased ambiguity exposure.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"84 ","pages":"Article 101655"},"PeriodicalIF":2.4,"publicationDate":"2025-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145027782","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-02DOI: 10.1016/j.jempfin.2025.101646
Ziwen Bu , Suyang Li , Rongbing Xiao
We analyze the effects of managerial job security on firm diversification. Our results indicate that enacting legal protection for managers’ employment is conducive to less corporate diversification. Our findings suggest that, in relation to managerial entrenchment and empire-building theories, hedging against employment risk is more likely to be the primary factor for managers when deciding to conduct firm diversification. Consistent with the explanation of agency theory in relation to firm diversification, we also document that refocusing firms increase firm value after enacting the implied-contract exception. The incremental firm value likely reflects the improved efficiency of capital allocation across divisions, as we find that firms increase the efficiency of their capital allocation after the adoption of the law.
{"title":"Managerial job security and firm diversification","authors":"Ziwen Bu , Suyang Li , Rongbing Xiao","doi":"10.1016/j.jempfin.2025.101646","DOIUrl":"10.1016/j.jempfin.2025.101646","url":null,"abstract":"<div><div>We analyze the effects of managerial job security on firm diversification. Our results indicate that enacting legal protection for managers’ employment is conducive to less corporate diversification. Our findings suggest that, in relation to managerial entrenchment and empire-building theories, hedging against employment risk is more likely to be the primary factor for managers when deciding to conduct firm diversification. Consistent with the explanation of agency theory in relation to firm diversification, we also document that refocusing firms increase firm value after enacting the implied-contract exception. The incremental firm value likely reflects the improved efficiency of capital allocation across divisions, as we find that firms increase the efficiency of their capital allocation after the adoption of the law.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"84 ","pages":"Article 101646"},"PeriodicalIF":2.4,"publicationDate":"2025-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145097581","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.jempfin.2025.101649
Matteo Bagnara, Benoit Vaucher
We examine how active risk- and holdings-based diversification of equity portfolios affect performance and vulnerability to large losses. Conducting a comprehensive empirical study of US-based funds, we find that risk-based and sector-based diversification significantly reduce active tail risk and the likelihood of extreme losses, without substantially diminishing portfolio performance. These effects are nonlinear and decreasing, suggesting that investors need not minimizing the concentration of their portfolios. We also examine these relationships on an unprecedented large sample of portfolios using a novel methodology that allows the production of portfolios with similar levels of risk, and find that they are robust to several definitions of extreme risk. Our results highlight the practical value of diversification in managing portfolio risk while maintaining competitive performance.
{"title":"Risk diversification and extreme risk mitigation","authors":"Matteo Bagnara, Benoit Vaucher","doi":"10.1016/j.jempfin.2025.101649","DOIUrl":"10.1016/j.jempfin.2025.101649","url":null,"abstract":"<div><div>We examine how active risk- and holdings-based diversification of equity portfolios affect performance and vulnerability to large losses. Conducting a comprehensive empirical study of US-based funds, we find that risk-based and sector-based diversification significantly reduce active tail risk and the likelihood of extreme losses, without substantially diminishing portfolio performance. These effects are nonlinear and decreasing, suggesting that investors need not minimizing the concentration of their portfolios. We also examine these relationships on an unprecedented large sample of portfolios using a novel methodology that allows the production of portfolios with similar levels of risk, and find that they are robust to several definitions of extreme risk. Our results highlight the practical value of diversification in managing portfolio risk while maintaining competitive performance.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101649"},"PeriodicalIF":2.4,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144931833","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.jempfin.2025.101647
Ying Yuan , Yong Qu , Tianyang Wang
This research introduces a novel constraint-based model framework for predicting risk premiums, thoroughly examining the mechanism and limitations of existing models in the literature and leveraging advanced machine learning techniques. The proposed framework effectively captures the regime-dependent forecasting characteristics. It incorporates the information content of predictive regression, “naive” historical average model, and zero value model, significantly reducing model uncertainty and parameter instability across univariate and multivariate predictions. Empirical analysis demonstrates the superiority of our strategy in terms of out-of-sample forecasting performance over a variety of competing models and under different market conditions, highlighting the robustness of our results. We further substantiate the validity of considering the market regime as an economic state variable and justify the rationality of our constraint-based model in elucidating the source of the improved predictability. Our study holds significant implications for financial and economic research, as well as practical applications in portfolio management and risk assessment.
{"title":"Predicting risk premiums: A constraint-based model","authors":"Ying Yuan , Yong Qu , Tianyang Wang","doi":"10.1016/j.jempfin.2025.101647","DOIUrl":"10.1016/j.jempfin.2025.101647","url":null,"abstract":"<div><div>This research introduces a novel constraint-based model framework for predicting risk premiums, thoroughly examining the mechanism and limitations of existing models in the literature and leveraging advanced machine learning techniques. The proposed framework effectively captures the regime-dependent forecasting characteristics. It incorporates the information content of predictive regression, “naive” historical average model, and zero value model, significantly reducing model uncertainty and parameter instability across univariate and multivariate predictions. Empirical analysis demonstrates the superiority of our strategy in terms of out-of-sample forecasting performance over a variety of competing models and under different market conditions, highlighting the robustness of our results. We further substantiate the validity of considering the market regime as an economic state variable and justify the rationality of our constraint-based model in elucidating the source of the improved predictability. Our study holds significant implications for financial and economic research, as well as practical applications in portfolio management and risk assessment.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101647"},"PeriodicalIF":2.4,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144925493","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-29DOI: 10.1016/j.jempfin.2025.101648
Gonçalo Faria , Fabio Verona
This paper explores the out-of-sample forecasting performance of 25 equity premium predictors over a sample period from 1973 to 2023. While conventional time-series methods reveal that only one predictor demonstrates significant out-of-sample predictive power, frequency-domain analysis uncovers additional predictive information hidden in the time series. Nearly half of the predictors exhibit statistically and economically meaningful predictive performance when decomposed into frequency components. The findings suggest that frequency-domain techniques can extract valuable insights that are often missed by traditional methods, enhancing the accuracy of equity premium forecasts.
{"title":"Unlocking predictive potential: The frequency-domain approach to equity premium forecasting","authors":"Gonçalo Faria , Fabio Verona","doi":"10.1016/j.jempfin.2025.101648","DOIUrl":"10.1016/j.jempfin.2025.101648","url":null,"abstract":"<div><div>This paper explores the out-of-sample forecasting performance of 25 equity premium predictors over a sample period from 1973 to 2023. While conventional time-series methods reveal that only one predictor demonstrates significant out-of-sample predictive power, frequency-domain analysis uncovers additional predictive information hidden in the time series. Nearly half of the predictors exhibit statistically and economically meaningful predictive performance when decomposed into frequency components. The findings suggest that frequency-domain techniques can extract valuable insights that are often missed by traditional methods, enhancing the accuracy of equity premium forecasts.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101648"},"PeriodicalIF":2.4,"publicationDate":"2025-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144916855","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-26DOI: 10.1016/j.jempfin.2025.101638
Shulin Shen , Yixuan Zhang , Eric Zivot
We propose an improvement to the information leadership (IL) measure of price discovery of Yan and Zivot (2010), and the information leadership share (ILS) measure of Putniņš (2013). Our improved PIL and PILS measures integrate the price discovery share (PDS) of Shen et al. (2024) with the component share (CS) measure. Our improved PIL measure accurately reflects the ratio of initial responses of competing markets to a permanent shock in the presence of correlated reduced-form vector error correction model residuals, thereby substantially generalizing the IL measure for practical applications. Simulation evidence strongly supports the superiority of our improved PIL measure over a wide spectrum of existing price discovery metrics (Lien and Shrestha, 2009; Putniņš, 2013; Sultan and Zivot, 2015; Patel et al., 2020). We demonstrate the effectiveness of our improved measure by examining price discovery for various Chinese stocks cross-listed in Shanghai and Hong Kong (SH-HK) both before and after the initiation of the Shanghai-Hong Kong Stock Connect.
{"title":"Improving information leadership share for measuring price discovery","authors":"Shulin Shen , Yixuan Zhang , Eric Zivot","doi":"10.1016/j.jempfin.2025.101638","DOIUrl":"10.1016/j.jempfin.2025.101638","url":null,"abstract":"<div><div>We propose an improvement to the information leadership (IL) measure of price discovery of Yan and Zivot (2010), and the information leadership share (ILS) measure of Putniņš (2013). Our improved PIL and PILS measures integrate the price discovery share (PDS) of Shen et al. (2024) with the component share (CS) measure. Our improved PIL measure accurately reflects the ratio of initial responses of competing markets to a permanent shock in the presence of correlated reduced-form vector error correction model residuals, thereby substantially generalizing the IL measure for practical applications. Simulation evidence strongly supports the superiority of our improved PIL measure over a wide spectrum of existing price discovery metrics (Lien and Shrestha, 2009; Putniņš, 2013; Sultan and Zivot, 2015; Patel et al., 2020). We demonstrate the effectiveness of our improved measure by examining price discovery for various Chinese stocks cross-listed in Shanghai and Hong Kong (SH-HK) both before and after the initiation of the Shanghai-Hong Kong Stock Connect.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101638"},"PeriodicalIF":2.4,"publicationDate":"2025-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144911819","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-25DOI: 10.1016/j.jempfin.2025.101651
Yangyang Chen , Jeffrey Ng , Emmanuel Ofosu , Xin Yang
Using the SEC’s 2016 Tick Size Pilot Program (TSPP) as a natural experiment, we investigate the effects of a tick size increase on firms’ choice of equity versus debt financing. We find that after the program’s implementation, TSPP-affected firms show a significant increase in equity issuance relative to that of debt. This finding is consistent with a reduction in adverse selection in equity financing due to more acquisition of fundamental information by these firms’ investors. In support of this inference, we show that the increase is concentrated among firms with investors that increase their information acquisition. We also find that the effect is more pronounced for firms that, prior to the program, have a higher level of concern about adverse selection in equity financing. Our study offers the novel insight that a tick size increase can affect firms’ financing choices because the increased tick size generates incentives for investors to acquire more fundamental information.
利用美国证券交易委员会（SEC） 2016年Tick Size Pilot Program （TSPP）作为自然实验，我们研究了Tick Size增加对公司选择股权融资与债务融资的影响。我们发现，在该计划实施后，受tspp影响的企业发行的股票相对于债券有显著的增加。这一发现与股权融资中逆向选择的减少是一致的，因为这些公司的投资者获得了更多的基本信息。为了支持这一推论，我们表明这种增长集中在有投资者的公司中，这些公司增加了他们的信息获取。我们还发现，对于那些在实施该计划之前对股权融资中的逆向选择有较高关注程度的公司来说，这种影响更为明显。我们的研究提供了一个新颖的见解，即滴答大小的增加会影响公司的融资选择，因为滴答大小的增加会激励投资者获取更多的基本信息。
{"title":"Tick size and firm financing decisions: Evidence from a natural experiment","authors":"Yangyang Chen , Jeffrey Ng , Emmanuel Ofosu , Xin Yang","doi":"10.1016/j.jempfin.2025.101651","DOIUrl":"10.1016/j.jempfin.2025.101651","url":null,"abstract":"<div><div>Using the SEC’s 2016 Tick Size Pilot Program (TSPP) as a natural experiment, we investigate the effects of a tick size increase on firms’ choice of equity versus debt financing. We find that after the program’s implementation, TSPP-affected firms show a significant increase in equity issuance relative to that of debt. This finding is consistent with a reduction in adverse selection in equity financing due to more acquisition of fundamental information by these firms’ investors. In support of this inference, we show that the increase is concentrated among firms with investors that increase their information acquisition. We also find that the effect is more pronounced for firms that, prior to the program, have a higher level of concern about adverse selection in equity financing. Our study offers the novel insight that a tick size increase can affect firms’ financing choices because the increased tick size generates incentives for investors to acquire more fundamental information.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101651"},"PeriodicalIF":2.4,"publicationDate":"2025-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144911817","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-13DOI: 10.1016/j.jempfin.2025.101642
Deshui Yu , Difang Huang , Mingtao Zhou
This article examines the time-series predictive ability of the monthly option-implied idiosyncratic skewness () for the aggregate stock market. We find that is a strong predictor of the U.S. equity premium using both in-sample and out-of-sample tests at forecast horizons up to 36 months over the period from January 1996 to December 2021. In comparison, outperforms the previously used financial and macroeconomic variables. Furthermore, combining information in the transitional predictors with can further improve the forecasting performance than using alone. We provide two explanations for the documented predictability. First, exhibits strong procyclical behavior and consistently declines ahead of economic downturns. Second, acts as a forward-looking signal of investor sentiment and disagreement—positive shocks to significantly increase both future investor sentiment and disagreement, with effects that persist over several horizons.
{"title":"Option-implied idiosyncratic skewness and expected returns: Mind the long run","authors":"Deshui Yu , Difang Huang , Mingtao Zhou","doi":"10.1016/j.jempfin.2025.101642","DOIUrl":"10.1016/j.jempfin.2025.101642","url":null,"abstract":"<div><div>This article examines the time-series predictive ability of the monthly option-implied idiosyncratic skewness (<span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span>) for the aggregate stock market. We find that <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> is a strong predictor of the U.S. equity premium using both in-sample and out-of-sample tests at forecast horizons up to 36 months over the period from January 1996 to December 2021. In comparison, <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> outperforms the previously used financial and macroeconomic variables. Furthermore, combining information in the transitional predictors with <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> can further improve the forecasting performance than using <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> alone. We provide two explanations for the documented predictability. First, <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> exhibits strong procyclical behavior and consistently declines ahead of economic downturns. Second, <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> acts as a forward-looking signal of investor sentiment and disagreement—positive shocks to <span><math><mrow><mi>S</mi><mi>k</mi><mi>e</mi><mi>w</mi></mrow></math></span> significantly increase both future investor sentiment and disagreement, with effects that persist over several horizons.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"83 ","pages":"Article 101642"},"PeriodicalIF":2.4,"publicationDate":"2025-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144911818","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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