Motivated by the parsimonious jump-diffusion model of Zhang, Zhao and Chang (2010), we show that the aggregate market returns can be predicted by the conditional skewness of returns and the variance risk premium, a difference between the physical and risk-neutral variance of market returns, even though the variance is supposed to be constant only if jump exists. The magnitude of the predictability is particularly striking at the intermediate quarterly return horizon, even combing other predictor variables, like P/D ratio, the default spread and the consumption-wealth ratio (CAY). We also find that the third central moments are significant in explaining the variance risk premium, which further implies that the potential link between the variance risk premium and the excess market return is the third central moments, not the skewness.postprintThe 9th China International Conference in Finance (CICF 2011), Wuhan, China, 4-7 July 2011
