Advanced Search

Papers Articles Authors Institutions Data (FRED®)

Abstract

The allowance for low-probability disasters, suggested by Rietz (1988), explains a lot of puzzles related to asset returns and consumption. These puzzles include the high equity premium, the low risk-free rate, the volatility of stock returns, and the low values of typical macro-econometric estimates of the intertemporal elasticity of substitution for consumption. 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. This resolution works even though price-earnings ratios tended also to be low during the wars. This approach achieves these explanations while maintaining the tractable framework of a representative agent, time-additive and iso-elastic preferences, complete markets, and i.i.d. shocks to productivity growth. Perhaps just as puzzling as the high equity premium is why Rietz's framework has not been taken more seriously by researchers in macroeconomics and finance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w11310.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11310.

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

Length:
Date of creation: May 2005
Date of revision:
Handle: RePEc:nbr:nberwo:11310

Note: AP EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

• NEP-ALL-2005-06-05 (All new papers)
• NEP-BEC-2005-06-05 (Business Economics)
• NEP-DGE-2005-06-05 (Dynamic General Equilibrium)
• NEP-RMG-2005-06-05 (Risk Management)

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

1. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
   
   • Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
2. Romer, Christina D., 1988. "World War I and the postwar depression A reinterpretation based on alternative estimates of GNP," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 91-115, July.
3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
   
   • Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
4. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Harvard Institute of Economic Research Working Papers 1897, Harvard - Institute of Economic Research.
   
   • John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, 08.
   • Campbell, John, 2000. "Asset Pricing at the Millennium," Scholarly Articles 3294737, Harvard University Department of Economics.
   • John Y. Campbell, 2000. "Asset Pricing at the Millennium," NBER Working Papers 7589, National Bureau of Economic Research, Inc.
5. Kocherlakota, Narayana R, 1990. " Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result," Journal of Finance, American Finance Association, vol. 45(1), pages 175-90, March.
6. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
7. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
   
   • Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
8. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
   
   • John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
9. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
10. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices kehoe02, Review of Economic Dynamics.
    
    • Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January.
11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
12. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
13. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938 Elsevier.
    
    • Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
14. Bruce Russett & Joel Slemrod, 1992. "Diminished Expectations of Nuclear War and Increased Personal Savings: Evidence From Individual Survey Data," NBER Working Papers 4031, National Bureau of Economic Research, Inc.
    
    • Russett, Bruce & Slemrod, Joel, 1993. "Diminished Expectations of Nuclear War and Increased Personal Savings: Evidence from Individual Survey Data," American Economic Review, American Economic Association, vol. 83(4), pages 1022-33, September.
15. Timothy J. Kehoe & Edward C. Prescott (), . "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, number 2007gdott.
    
    • Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January.
16. Casey B. Mulligan, 1997. "Pecuniary Incentives to Work in the U.S. during World War II," NBER Working Papers 6326, National Bureau of Economic Research, Inc.

Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:

1. Tom Sargent on Macro: All's Well
   by Eric Falkenstein in Falkenblog on 2010-11-10 02:13:00
2. On low probability catastrophic events
   by Economic Logician in Economic Logic on 2008-06-11 18:13:00

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

Cited by:

1. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
   
   • Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
2. Ricardo Caballero & Arvind Krishnamurthy, 2005. "Financial System Risk and Flight to Quality," NBER Working Papers 11834, National Bureau of Economic Research, Inc.
3. Ricardo J. Caballero & Arvind Krishnamurthy, 2006. "Flight to Quality and Collective Risk Management," NBER Working Papers 12136, National Bureau of Economic Research, Inc.
4. Jorge A. Chan-Lau, 2006. "Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices," IMF Working Papers 06/148, International Monetary Fund.
5. Pesaran, M.H. & Pettenuzzo, D. & Timmermann, A., 2006. "Learning, Structural Instability and Present Value Calculations," Cambridge Working Papers in Economics 0602, Faculty of Economics, University of Cambridge.
   
   • Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2007. "Learning, Structural Instability, and Present Value Calculations," Econometric Reviews, Taylor and Francis Journals, vol. 26(2-4), pages 253-288.
   • M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, structural instability and present value calculations," Computing in Economics and Finance 2006 529, Society for Computational Economics.
   • Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," IEPR Working Papers 06.42, Institute of Economic Policy Research (IEPR).
   • M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," CESifo Working Paper Series 1650, CESifo Group Munich.
   • Pesaran, Mohammad Hashem & Pettenuzzo, Davide & Timmermann, Allan, 2006. "Learning, structural instability and present value calculations," Discussion Paper Series 1: Economic Studies 2006,27, Deutsche Bundesbank, Research Centre.
6. Alejandrina Salcedo & Todd Schoellman & Michèle Tertilt, 2012. "Families as roommates: Changes in U.S. household size from 1850 to 2000," Quantitative Economics, Econometric Society, vol. 3(1), pages 133-175, 03.
   
   • Salcedo, Alejandrina & Schoellman, Todd & Tertilt, Michèle, 2009. "Families as Roommates: Changes in U.S. Household Size from 1850 to 2000," CEPR Discussion Papers 7543, C.E.P.R. Discussion Papers.
   • Michele Tertilt, 2009. "Families as Roommates: Changes in U.S. Household Size from 1850 to 2000," Discussion Papers 09-001, Stanford Institute for Economic Policy Research.
   • Alejandrina Salcedo & Todd Schoellman & Michèle Tertilt, 2010. "Families as Roommates: Changes in U.S. Household Size from 1850 to 2000," Working Papers 2010-07, Banco de México.
   • Alejandrina Salcedo & Todd Schoellman & Michèle Tertilt, 2009. "Families as Roommates: Changes in U.S. Household Size from 1850 to 2000," NBER Working Papers 15477, National Bureau of Economic Research, Inc.
7. Blake, David & Cairns, Andrew & Dowd, Kevin, 2008. "Turning pension plans into pension planes: What investment strategy designers of defined contribution pension plans can learn from commercial aircraft designers," MPRA Paper 33749, University Library of Munich, Germany.
8. Paolo Mauro & Törbjörn I. Becker, 2006. "Output Drops and the Shocks That Matter," IMF Working Papers 06/172, International Monetary Fund.
9. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2005. "Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options," NBER Working Papers 11861, National Bureau of Economic Research, Inc.
10. Salyer, Kevin D., 2007. "Macroeconomic priorities and crash states," Economics Letters, Elsevier, vol. 94(1), pages 64-70, January.
    
    • Kevin Salyer, 2005. "Macroeconomic Priorities and Crash States," Working Papers 55, University of California, Davis, Department of Economics.
    • Salyer, Kevin, 2005. "Macroeconomic Priorities and Crash States," Working Papers 05-5, University of California at Davis, Department of Economics.
11. Robert J. Barro, 2007. "Rare Disasters, Asset Prices, and Welfare Costs," NBER Working Papers 13690, National Bureau of Economic Research, Inc.
    
    • Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-64, March.
12. Lehmann, Bruce N., 2009. "The role of beliefs in inference for rational expectations models," Journal of Econometrics, Elsevier, vol. 150(2), pages 322-331, June.

Lists

This item is featured on the following reading lists or Wikipedia pages:

1. Economic Logic blog

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11310

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

---

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.

Privacy Legal