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Editor's Choice Rare Booms and Disasters in a Multisector Endowment Economy

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  • Jerry Tsai
  • Jessica A. Wachter

Abstract

Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance, while growth stocks exhibit negative abnormal performance? This paper offers a rare-event-based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data, such as joint patterns in time-series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns. Received March 18, 2013; accepted October 18, 2015 by Editor Pietro Veronesi.

Suggested Citation

  • Jerry Tsai & Jessica A. Wachter, 2016. "Editor's Choice Rare Booms and Disasters in a Multisector Endowment Economy," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1113-1169.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:5:p:1113-1169.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv074
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    Citations

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    Cited by:

    1. Sönksen, Jantje & Grammig, Joachim, 2021. "Empirical asset pricing with multi-period disaster risk: A simulation-based approach," Journal of Econometrics, Elsevier, vol. 222(1), pages 805-832.
    2. Rahman, Md Lutfur & Amin, Abu & Al Mamun, Mohammed Abdullah, 2021. "The COVID-19 outbreak and stock market reactions: Evidence from Australia," Finance Research Letters, Elsevier, vol. 38(C).
    3. Hongye Guo & Jessica A. Wachter, 2019. ""Superstitious" Investors," NBER Working Papers 25603, National Bureau of Economic Research, Inc.
    4. Malik, Ihtisham A. & Chowdhury, Hasibul & Alam, Md Samsul, 2023. "Equity market response to natural disasters: Does firm's corporate social responsibility make difference?," Global Finance Journal, Elsevier, vol. 55(C).
    5. Apergis, Nicholas & Mustafa, Ghulam & Malik, Shafaq, 2023. "The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 27-35.
    6. Graziano, Elvira Anna & Fattobene, Lucrezia & Ricci, Ornella & Scimone, Xenia, 2023. "Market reactions to Recovery Fund press releases during COVID-19: An event-study analysis," Economics Letters, Elsevier, vol. 230(C).
    7. Bo Liu & Yingjie Niu & Jinqiang Yang & Zhentao Zou, 2020. "Time‐varying risk of rare disasters, investment, and asset pricing," The Financial Review, Eastern Finance Association, vol. 55(3), pages 503-524, August.
    8. George P. Gao & Xiaomeng Lu & Zhaogang Song, 2019. "Tail Risk Concerns Everywhere," Management Science, INFORMS, vol. 65(7), pages 3111-3130, July.
    9. Tsai, Jerry & Wachter, Jessica A., 2018. "Pricing long-lived securities in dynamic endowment economies," Journal of Economic Theory, Elsevier, vol. 177(C), pages 848-878.
    10. Rahman, Md Lutfur & Al Mamun, Mohammed Abdullah, 2021. "How resilient are the Asia Pacific financial markets against a global pandemic?," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    11. Simon Oh & Jessica A. Wachter, 2018. "Cross-sectional Skewness," NBER Working Papers 25113, National Bureau of Economic Research, Inc.

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