International Finance Discussion Papers (IFDP)

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March 2018

Stock Market Cross-Sectional Skewness and Business Cycle Fluctuations

Thiago R. T. Ferreira

Abstract:

Using U.S. data from 1926 to 2015, I show that financial skewness--a measure comparing cross-sectional upside and downside risks of the distribution of stock market returns of financial firms--is a powerful predictor of business cycle fluctuations. I then show that shocks to financial skewness are important drivers of business cycles, identifying these shocks using both vector autoregressions and a dynamic stochastic general equilibrium model. Financial skewness appears to reflect the exposure of financial firms to the economic performance of their borrowers.

Keywords: Cross-Sectional Skewness, Business Cycle Fluctuations, Financial Channel

DOI: https://doi.org/10.17016/IFDP.2018.1223

PDF: Full Paper

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Last Update: January 09, 2020