Disaster Risk and its Implications for Asset Pricing / Jerry Tsai, Jessica A. Wachter.

Format:

Book

Author/Creator:

Tsai, Jerry.

Contributor:

National Bureau of Economic Research.

Wachter, Jessica A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20926.

NBER working paper series no. w20926

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

After laying dormant for more than two decades, the rare disaster framework has emerged as a leading contender to explain facts about the aggregate market, interest rates, and financial derivatives. In this paper we survey recent models of disaster risk that provide explanations for the equity premium puzzle, the volatility puzzle, return predictability and other features of the aggregate stock market. We show how these models can also explain violations of the expectations hypothesis in bond pricing, and the implied volatility skew in option pricing. We review both modeling techniques and results and consider both endowment and production economies. We show that these models provide a parsimonious and unifying framework for understanding puzzles in asset pricing.

Notes:

Print version record

February 2015.