Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices

Max Gillman, Michal Kejak () and Michal Pakos

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Rietz (1988) and Barro (2006) subject consumption and dividends to rare disasters in the growth rate. We extend their framework and subject consumption and dividends to rare disasters in the growth persistence. Wemodel growth persistence by means of two hidden types of economic slowdowns: recessions and lost decades. We estimate the model based on the post-war U.S. data using maximum likelihood and find that it can simultaneously match a wide array of dynamic pricing phenomena in the equity and bond markets. The key intuition for our results stems from the inability to discriminate between the short and the long recessions ex ante.

Keywords: asset pricing; rare events; learning; stagnation; long-run risk; Peso problem (search for similar items in EconPapers)
JEL-codes: E13 E21 E32 E43 E44 G12 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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