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Rare Booms and Disasters in a Multi-sector Endowment Economy

  • Jerry Tsai
  • Jessica A. Wachter

In this paper we exploit a fundamental difference between positive and negative rare events to explain the value premium. We show that if booms are expected but do not occur, average in-sample returns will be lower for assets that are exposed to booms than for those that are not. We build a general equilibrium endowment economy in which growth stocks are endogenously more exposed to booms than other assets. We show that this effect can account for most of the observed value premium, the low abnormal performance of growth stocks, and the high volatility and betas of growth stocks in the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20062.

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Date of creation: Apr 2014
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Handle: RePEc:nbr:nberwo:20062
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