Extreme negative outcomes in consumer spending predict stock market returns much better than general volatility.
April 29, 2026
Original Paper
Pricing the Left Tail: Consumption Skewness and Expected Returns
SSRN · 6662140
The Takeaway
Investors care far more about the risk of a total economic collapse than they do about regular market swings. Traditional finance models focus on variance to explain why stocks move the way they do. High precision data on consumption skewness reveals that the fear of rare and catastrophic drops is the real driver of equity prices. This means the stock market is less of a barometer for general growth and more of a mirror for our specific anxieties about disaster. Understanding these rare event risks is the only way to accurately price future returns.
From the abstract
Downside risk to aggregate consumption growth predicts equity returns. We estimate the conditional distribution of U.S. consumption growth using quantile regressions with machine-learning variable selection, and summarize downside risk by Kelley skewness, the asymmetry between the upside and downside of the distribution. A more left-skewed conditional distribution forecasts 12-month excess returns roughly 16 percentage points higher, with an out-of-sample R 2 of 7.8%. Symmetric risk measures suc