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Time-varying rare disaster risk and stock returns

  • Berkman, Henk
  • Jacobsen, Ben
  • Lee, John B.
Registered author(s):

    This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918-2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings-price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 313-332

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:313-332
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