Working Paper

Stock Market Cross-Sectional Skewness and Business Cycle Fluctuations

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;

JEL Classification: C32; E32; E37; E44;

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

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2018-03-06

Number: 1223

Pages: 46 pages