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Crises and Recoveries in an Empirical Model of Consumption Disasters

  • Emi Nakamura
  • Jón Steinsson
  • Robert Barro
  • José Ursúa

We estimate an empirical model of consumption disasters using new data on consumption for 24 countries over more than 100 years, and study its implications for asset prices. The model allows for partial recoveries after disasters that unfold over multiple years. We find that roughly half of the drop in consumption due to disasters is subsequently reversed. Our model generates a sizable equity premium from disaster risk, but one that is substantially smaller than in simpler models. It implies that a large value of the intertemporal elasticity of substitution is necessary to explain stock-market crashes at the onset of disasters.

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 3 (July)
Pages: 35-74

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:3:p:35-74
Note: DOI: 10.1257/mac.5.3.35
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  3. Jessica Wachter, 2008. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," NBER Working Papers 14386, National Bureau of Economic Research, Inc.
  4. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  5. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
  6. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  7. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
  8. Ian W. R. Martin, 2008. "Disasters and the Welfare Cost of Uncertainty," American Economic Review, American Economic Association, vol. 98(2), pages 74-78, May.
  9. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  10. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  11. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
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