Rare Disasters and Asset Markets in the Twentieth Century

Robert Barro

Scholarly Articles from Harvard University Department of 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, time-additive 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.

Date: 2006
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Published in The Quarterly Journal of Economics

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Related works:
Working Paper: Rare Disasters and Asset Markets in the Twentieth Century (2024)
Journal Article: Rare Disasters and Asset Markets in the Twentieth Century (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3208215

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