Rare Disasters and Asset Markets in the Twentieth Century

Robert Barro

No 620, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: The potential for rare economic disasters explains a lot of asset-pricing puzzles. I calibrate disaster probabilities from the twentieth century global history, especially the sharp contractions associated with World War I, the Great Depression, and World War II. The puzzles that can be explained include the high equity premium, low risk-free rate, and volatile stock returns. Another mystery that may be resolved is why expected real interest rates were low in the United States during major wars, such as World War II. The model, an extension of work by Rietz, maintains the tractable framework of a representative agent, timeadditive and isoelastic preferences, and complete markets. The results hold with i.i.d. shocks to productivity growth in a Lucas-tree type economy and also with the inclusion of capital formation.

Pages: 44 pages
Date: 2024-02-17
New Economics Papers: this item is included in nep-fdg and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in The Quarterly Journal of Economics, 2006, vol. 121, issue 3, 823-866.

Downloads: (external link)
https://down.aefweb.net/WorkingPapers/w620.pdf (application/pdf)

Related works:
Journal Article: Rare Disasters and Asset Markets in the Twentieth Century (2006)
Working Paper: Rare Disasters and Asset Markets in the Twentieth Century (2006)
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:cuf:wpaper:620

Access Statistics for this paper

More papers in CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().