The skewness of oil price returns and equity premium predictability

We show that the three-order moment of oil price returns can predict the aggregate stock market returns. Empirical results indicate the stock market returns forecasts generated by the skewness of oil price returns are statistically and economically significant for out-of-sample performance. We add the skewness of oil price returns as an additional predictor into the univariate macro model, and obtain greater forecast gains. When using multivariate information method, this prediction improvement also exists. Strong evidence demonstrates that the forecasting power is higher in recession. In addition, our finding is robust when considering alternative aversion coefficient and transaction cost. (C) 2020 Elsevier B.V. All rights reserved.