Stock-market crashes and depressions
Robert Barro and
José F. Ursúa
Research in Economics, 2017, vol. 71, issue 3, 384-398
Stock-market crashes are informative about the prospects for macroeconomic depressions. Long-term data for 30 countries reveal that, conditional on a crash, the probability of a minor depression is 31 percent and of a major depression is 10 percent. The largest depressions are particularly likely to be accompanied by crashes. We allow for flexible timing between crashes and depressions to compute the covariance between stock-returns and an asset-pricing factor, which depends on the decline of consumption during a depression. With a coefficient of relative risk aversion around 3.5, this covariance accounts for the observed average (levered) equity premium of 7 percent.
Keywords: Rare disasters; Stock-market crashes; Flexible covariance analysis (search for similar items in EconPapers)
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Working Paper: Stock-Market Crashes and Depressions (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:71:y:2017:i:3:p:384-398
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