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Challenging the rare disaster model: An empirical analysis using the survey of professional forecasters

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  • Naebi, Fatemeh

Abstract

This study assesses the extent to which rare-disaster models explain the equity premium when calibrated with downside tail probabilities from the Survey of Professional Forecasters (SPF). Each quarter, this probability is incorporated into canonical Barro-type models as the representative agent’s subjective belief about disaster risk, thereby allowing time variation in beliefs. While this calibration generates elevated equity premia during crisis episodes, it fails to account for the magnitude of the observed equity premium in normal periods, implying an average equity premium of approximately 3.3%, roughly half the historical U.S. average. These findings suggest that standard rare-disaster models omit important mechanisms or risk channels relevant for asset pricing, casting doubt on the sufficiency of disaster risk as a standalone explanation for the equity premium puzzle.

Suggested Citation

  • Naebi, Fatemeh, 2026. "Challenging the rare disaster model: An empirical analysis using the survey of professional forecasters," Finance Research Letters, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:finlet:v:101:y:2026:i:c:s1544612326005787
    DOI: 10.1016/j.frl.2026.110049
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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