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Risks after Disasters: A Note on the Effects of Precautionary Saving on Equity Premiums

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  • Shiba Suzuki

Abstract

This paper studies the effects on equity premiums of grisks after disasters h, which are defined as a sharp rise in volatility of real per capita GDP growth rates immediately following disasters. This paper makes three contributions. First, we analytically demonstrate that if and only if the degree of relative prudence is higher than 2, risks after disasters decrease equity premiums. Second, we find that the differences between equity premiums with and without risks after disasters are quantitatively significant. Third, equity premiums are still higher in the case of disaster than without a disaster.

Suggested Citation

  • Shiba Suzuki, 2009. "Risks after Disasters: A Note on the Effects of Precautionary Saving on Equity Premiums," Global COE Hi-Stat Discussion Paper Series gd08-040, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hst:ghsdps:gd08-040
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd08-040.pdf
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    1. Masahiro Hori & Satoshi Shimizutani, 2006. "Did Japanese consumers become more prudent during 1998-1999? Evidence from household-level data," International Economic Journal, Taylor & Francis Journals, vol. 20(2), pages 197-209.
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    3. Merrigan, Philip & Normandin, Michel, 1996. "Precautionary Saving Motives: An Assessment from UK Time Series of Cross-Sections," Economic Journal, Royal Economic Society, vol. 106(438), pages 1193-1208, September.
    4. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    5. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    6. Francois Gourio, 2008. "Disasters and Recoveries," American Economic Review, American Economic Association, vol. 98(2), pages 68-73, May.
    7. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
    8. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
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    Cited by:

    1. Suzuki, Shiba, 2012. "Stock market booms in economies damaged during World War II," Research in Economics, Elsevier, vol. 66(2), pages 175-183.

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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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