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Macroeconomic disasters and the equity premium puzzle: Are emerging countries riskier?

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  • Horvath, Jaroslav

Abstract

Not necessarily. I provide evidence that advanced countries’ equity premium and consumption growth differ significantly from those of emerging countries. I then estimate distinct disaster risk parameters for these two country groups. My Bayesian analysis demonstrates that in some aspects advanced countries are more exposed to disaster risk, while in others their exposure is smaller. Disasters are estimated to be more severe and uncertain in advanced countries, but are on average less persistent. Advanced countries are also more likely to experience a global disaster, whereas disasters in emerging countries tend to be more idiosyncratic. I show that country-group heterogeneity in disaster length and magnitude has the largest impact on equity premium.

Suggested Citation

  • Horvath, Jaroslav, 2020. "Macroeconomic disasters and the equity premium puzzle: Are emerging countries riskier?," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
  • Handle: RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188920300221
    DOI: 10.1016/j.jedc.2020.103852
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    More about this item

    Keywords

    Consumption disasters; Equity premium; Bayesian Markov chain Monte Carlo;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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