PERSISTENT CATASTROPHIC SHOCKS AND EQUITY PREMIUMS: A NOTE

Makoto Saito and Shiba Suzuki

Macroeconomic Dynamics, 2014, vol. 18, issue 5, 1161-1171

Abstract: This note demonstrates analytically that a persistent catastrophic shock on endowment growth, even if moderate, yields negative equity premiums when a representative agent is relatively prudent. In particular, it derives the minimum persistence necessary to have zero equity premiums.

Date: 2014
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