Predicting the equity risk premium using the smooth cross-sectional tail risk: The importance of correlation

This is the authors' abstract. We don't add key points for this paper.

I provide a new monthly cross-sectional measure of stock market tail risk, SCSTR , defined as the average of the daily cross-sectional tail risk, rather than the tail risk of the pooled daily returns within a month. Through simulations, I find that SCSTR better captures monthly tail risk rather than merely the tail risk on specific days within a month. In an extended period from 1964 until 2018, this difference is important in generating strong in- and out-of-sample predictability and performs better than the historical risk premium and other commonly-used predictors for short- and long-term horizons.