Abstract
This paper investigates whether the change of average risk-neutral skewness (RNS), which is the average of monthly risk-neutral skewness across firms, can predict subsequent aggregate stock returns. We find that average RNS positively and significantly predicts future aggregate stock returns, consistent with the firm-level evidence. Our findings are robust after controlling for other well-documented financial and economic stock return predictors. Moreover, we document that the robustness of predictability still holds in out-of-sample settings. Finally, we show that the forecasting ability of average RNS stems from its better performances during the economic recession rather than economic expansion and its pronounced predictability among stocks that are more speculative and difficult to arbitrage.
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