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Crises and Recoveries in an Empirical Model of Consumption Disasters

  • Emi Nakamura
  • Jón Steinsson
  • Robert Barro
  • José Ursúa

We estimate an empirical model of consumption disasters using a new panel data set on personal consumer expenditure for 24 countries and more than 100 years, and study its implications for asset prices. The model allows for permanent and transitory effects of disasters that unfold over multiple years. It also allows the timing of disasters to be correlated across countries. Our estimates imply that the average disaster reaches its trough after 6 years, with a peak-to-trough drop in consumption of about 30%, but that roughly half of this decline is reversed in a subsequent recovery. Uncertainty about consumption growth increases dramatically during disasters. Our estimated model generates a sizable equity premium from disaster risk, but one that is substantially smaller than in models in which disasters are permanent and instantaneous. It yields new predictions for the dynamics of risk-free interest rates, the term structure of interest rates, and the pricing of short-term versus long-term risky assets. The persistence of consumption declines in our model implies that a large value of the intertemporal elasticity of substitution is necessary to explain stock-market crashes at the onset of disasters.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15920.

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Date of creation: Apr 2010
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Publication status: published as Emi Nakamura & Jón Steinsson & Robert Barro & José Ursúa, 2013. "Crises and Recoveries in an Empirical Model of Consumption Disasters," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 35-74, July.
Handle: RePEc:nbr:nberwo:15920
Note: AP EFG ME
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  1. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  2. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
  3. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  4. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Scholarly Articles 9887621, Harvard University Department of Economics.
  6. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, 06.
  7. Ian W. R. Martin, 2008. "Disasters and the Welfare Cost of Uncertainty," American Economic Review, American Economic Association, vol. 98(2), pages 74-78, May.
  8. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  9. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
  10. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  11. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
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