Rare Events, Financial Crises, and the Cross-Section of Asset Returns

Francesco Bianchi

No 10520, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. The Great Depression regime implies a collapse of the stock market, with small-growth stocks outperforming small-value stocks. This helps to explain the cross section of asset returns when risk is priced according to a version of the "Bad Beta, Good Beta" Intertemporal CAPM that allows for regime changes.

Keywords: Great depression; Great recession; Financial crises; Intertemporal capm; Markov-switching var (search for similar items in EconPapers)
JEL-codes: C32 G01 G12 (search for similar items in EconPapers)
Date: 2015-03
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Rare Events, Financial Crises, and the Cross-Section of Asset Returns (2010)
Working Paper: Rare Events, Financial Crises, and the Cross-Section of Asset Returns (2010)
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