# Can systematic skewness factors predict future interest rates: Evidence from China

## TL;DR

This study shows that investors' preferences for stock skewness can predict future interest rates in China, offering a new way to monitor market sentiment and liquidity anxiety.

## Contribution

The novel contribution is demonstrating that systematic skewness factors can predict interest rates better than traditional models.

## Key findings

- Systematic skewness factors significantly predict future interest rates in China.
- Prediction errors using skewness factors are lower than AR and Taylor-rule models.
- Skewness increases signal investor anxiety about liquidity tightening.

## Abstract

This study uses the numerical changes of the systematic skewness factors to reflect investors’ preferences for the systematic skewness of stocks. As systematic skewness describes the correlation between individual stock returns and market volatility, stocks with positive systematic skewness can obtain positive returns during periods of market volatility. Thus, investors’ preferences for the systematic skewness of stocks can reflect their hedging demands. By examining the predictive power of systematic skewness factors on future interest rates, we found that systematic skewness factors have a significant predictive power on future interest rates. This indicates that investors’ hedging demands influence adjustments to interest rates by China’s monetary authorities. Moreover, for both short‑term and long‑term interest rates, prediction errors based on systematic skewness factors are consistently lower than those from an AR model and the extended Taylor‑rule model proposed by Ma et al. (2025). Systematic skewness can serve as an asymmetric pricing signal in the market for extreme interest rate risks. Its increase often indicates a rise in investors’ anxiety over liquidity tightening, thereby providing central banks with a forward-looking sentiment monitoring window independent of traditional economic indicators.