Moment Risk Premia and Stock Return Predictability

We study the predictive power of option-implied moment risk premia embedded in the conventional variance risk premium. We find that while the second moment risk premium predicts market returns in short horizons with positive coefficients, the third (fourth) moment risk premium predicts market returns in medium horizons with negative (positive) coefficients. Combining the higher moment risk premia with the second moment risk premium improves the stock return predictability over multiple horizons, both in-sample and out-of-sample. The finding is economically significant in an asset allocation exercise, and survives a series of robustness checks.