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Time-varying rare disaster risk and stock returns

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  • Berkman, Henk
  • Jacobsen, Ben
  • Lee, John B.
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    Abstract

    This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918-2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings-price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11000523
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 313-332

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:313-332

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Equity premium Volatility Rare disasters International political crises Consumption;

    References

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    Cited by:
    1. Robert J. Barro & José F. Ursúa, 2012. "Rare Macroeconomic Disasters," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 83-109, 07.
    2. Francois Gourio, 2009. "Disaster risk and business cycles," 2009 Meeting Papers 1176, Society for Economic Dynamics.
    3. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Centre for Economic History, Queen's University Belfast.
    4. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
    5. He, Yinghua & Nielsson, Ulf & Wang, Yonglei, 2014. "The Cost of Political Tension: An Anatomy," TSE Working Papers 14-484, Toulouse School of Economics (TSE).
    6. Ruenzi, Stefan & Weigert, Florian, 2011. "Crash Sensitivity and the Cross-Section of Expected Stock Returns," Working Papers on Finance 1324, University of St. Gallen, School of Finance, revised Mar 2013.
    7. Weigert, Florian, 2012. "In Search of Cushion? Crash Aversion and the Cross-Section of Expected Stock Returns Worldwide," Working Papers on Finance 1325, University of St. Gallen, School of Finance, revised Mar 2013.

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