Rare Events and Long-Run Risks

Robert Barro and Tao Jin ()

Review of Economic Dynamics, 2021, vol. 39, 1-25

Abstract: Rare events (RE) and long-run risks (LRR) are complementary approaches for characterizing macroeconomic variables and understanding asset pricing. We estimate a model with RE and LRR using long-term consumption data for 42 economies, identify these two types of risks simultaneously from the data, and reveal their distinctions. RE typically associates with major historical episodes, such as world wars and depressions and analogous country-specific events. LRR reflects gradual processes that influence long-run growth rates and volatility. A match between the model and observed average rates of return on equity and short-term bonds requires a coefficient of relative risk aversion, γ, around 6. Most of the explanation for the equity premium derives from RE, although LRR makes a moderate contribution. However, LRR helps in fitting the Sharpe ratio. Generating good matches to the equity premium and Sharpe ratio simultaneously is still challenging. (Copyright: Elsevier)

Keywords: Rare events; Long-run risks; Asset pricing; Risk aversion (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 G12 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2020.08.002
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "Rare Events and Long-Run Risks" (2020)
Working Paper: Online Appendix to "Rare Events and Long-Run Risks" (2020)
Working Paper: Rare events and long-run risks (2016)
Working Paper: Rare Events and Long-Run Risks (2016)
Working Paper: Rare Events and Long-Run Risks (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:18-485

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2020.08.002

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().