Macroeconomic risk and higher-moment risk premia

In this paper I investigate the relation between macroeconomic risk and higher-moment risk premia. I use existing methodology on higher-moment swaps and estimate the excess returns for variance and skewness swaps. I also introduce new methodology for kurtosis swaps. The expected excess returns on such swaps are interpreted as higher-moment risk premia. I find evidence supporting an increase in tail risk when variance is low and expectations about economic growth are positive. In such periods higher-moment swaps act as a hedge against elevated tail risk, and buyers of such swaps accept lower returns, while sellers of the swaps collect higher-moment risk premia. I find evidence supporting a common source for higher-moment risk premia and that macroeconomic risk could propagate through this source. Finally, I present evidence that higher-moment swaps are good candidates for hedging macroeconomic risk due to higher payoffs when expectations about growth are negative