Time-varying rare disaster risk and stock returns

Henk Berkman, Ben Jacobsen and John B. Lee

Journal of Financial Economics, 2011, vol. 101, issue 2, 313-332

Abstract: This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918-2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings-price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.

Keywords: Equity; premium; Volatility; Rare; disasters; International; political; crises; Consumption (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (128)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:101:y:2011:i:2:p:313-332

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