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Rare Macroeconomic Disasters

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  • Robert J. Barro
  • José F. Ursua

Abstract

The potential for rare macroeconomic disasters may explain an array of asset-pricing puzzles. Our empirical studies of these extreme events rely on long-term data now covering 28 countries for consumption and 40 for GDP. A baseline model calibrated with observed peak-to-trough disaster sizes accords with the average equity premium with a reasonable coefficient of relative risk aversion. High stock-price volatility can be explained by incorporating time-varying long-run growth rates and disaster probabilities. Business-cycle models with shocks to disaster probability have implications for the cyclical behavior of asset returns and corporate leverage, and international versions may explain the uncovered-interest-parity puzzle. Richer models of disaster dynamics allow for transitions between normalcy and disaster, bring in post-crisis recoveries, and use the full time series on consumption. Potential future research includes applications to long-term economic growth and environmental economics and the use of stock-price options and other variables to gauge time-varying disaster probabilities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17328.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17328

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Cited by:
  1. Joshua Aizenman & Ilan Noy, 2012. "Macroeconomic Adjustment and the History of Crises in Open Economies," NBER Working Papers 18527, National Bureau of Economic Research, Inc.
  2. Mehl, Arnaud, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Working Paper Series 1548, European Central Bank.
  3. Doukas, John A. & Zhang, Hao, 2013. "The performance of NDF carry trades," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 172-190.
  4. Joshua Aizenman & Ilan Noy, 2013. "Public and Private Saving and the Long Shadow of Macroeconomic Shocks," NBER Working Papers 19067, National Bureau of Economic Research, Inc.
  5. Salvador Pueyo, 2013. "Is it a power law distribution? The case of economic contractions," Papers 1310.2567, arXiv.org.

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