Moment Risk Premia and the Cross-Section of Stock Returns

Abstract

We first investigate comprehensively whether the moment risk premia are able to predict the cross-section of stock returns. The moment risk premia are defined as the difference between expected realised and risk-neutral moment. Cross-sectionally, we find that the variance, skew and kurtosis risk premia are determined differently by firm-level and risk variables. We also find that the moment risk premia have different effects on stock returns. Both the variance and skew risk premia are negatively related to stock returns. However, the kurtosis risk premium has a noisy and insignificant relation with realised returns, which depends on whether the portfolio is value-weighted or equally-weighted. The results are robust to firm-level and risk factors and sub-periods.