Variable rare disasters: an exactly solved framework for ten puzzles in macro-finance
This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset's fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and...
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| Format: | Buch |
| Sprache: | English |
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Cambridge, Mass.
National Bureau of Economic Research
2008
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| Schriftenreihe: | Working paper series / National Bureau of Economic Research
13724 |
| Online-Zugang: | kostenfrei |
| Zusammenfassung: | This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset's fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and thus volatile asset prices and return predictability. Using the recent technique of linearity-generating processes (Gabaix 2007), the model is tractable, and all prices are exactly solved in closed form. In the "variable rare disasters" framework, the following empirical regularities can be understood qualitatively: (i) equity premium puzzle (ii) risk-free rate-puzzle (iii) excess volatility puzzle (iv) predictability of aggregate stock market returns with price-dividend ratios (v) value premium (vi) often greater explanatory power of characteristics than covariances for asset returns (vii) upward sloping nominal yield curve (viiii) a steep yield curve predicts high bond excess returns and a fall in long term rates (ix) corporate bond spread puzzle (x) high price of deep out-of-the-money puts. I also provide a calibration in which those puzzles can be understood quantitatively as well. The fear of disaster can be interpreted literally, or can be viewed as a tractable way to model time-varying risk-aversion or investor sentiment. |
| Beschreibung: | 44 S. graph. Darst. 22 cm |
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| index_date | 2024-07-02T22:41:32Z |
| indexdate | 2024-07-09T21:25:15Z |
| institution | BVB |
| language | English |
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| spelling | Gabaix, Xavier Verfasser (DE-588)131457594 aut Variable rare disasters an exactly solved framework for ten puzzles in macro-finance Xavier Gabaix Cambridge, Mass. National Bureau of Economic Research 2008 44 S. graph. Darst. 22 cm txt rdacontent n rdamedia nc rdacarrier Working paper series / National Bureau of Economic Research 13724 This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset's fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and thus volatile asset prices and return predictability. Using the recent technique of linearity-generating processes (Gabaix 2007), the model is tractable, and all prices are exactly solved in closed form. In the "variable rare disasters" framework, the following empirical regularities can be understood qualitatively: (i) equity premium puzzle (ii) risk-free rate-puzzle (iii) excess volatility puzzle (iv) predictability of aggregate stock market returns with price-dividend ratios (v) value premium (vi) often greater explanatory power of characteristics than covariances for asset returns (vii) upward sloping nominal yield curve (viiii) a steep yield curve predicts high bond excess returns and a fall in long term rates (ix) corporate bond spread puzzle (x) high price of deep out-of-the-money puts. I also provide a calibration in which those puzzles can be understood quantitatively as well. The fear of disaster can be interpreted literally, or can be viewed as a tractable way to model time-varying risk-aversion or investor sentiment. Erscheint auch als Online-Ausgabe National Bureau of Economic Research <Cambridge, Mass.> NBER working paper series 13724 (DE-604)BV002801238 13724 http://papers.nber.org/papers/w13724.pdf kostenfrei Volltext |
| spellingShingle | Gabaix, Xavier Variable rare disasters an exactly solved framework for ten puzzles in macro-finance |
| title | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance |
| title_auth | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance |
| title_exact_search | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance |
| title_exact_search_txtP | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance |
| title_full | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance Xavier Gabaix |
| title_fullStr | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance Xavier Gabaix |
| title_full_unstemmed | Variable rare disasters an exactly solved framework for ten puzzles in macro-finance Xavier Gabaix |
| title_short | Variable rare disasters |
| title_sort | variable rare disasters an exactly solved framework for ten puzzles in macro finance |
| title_sub | an exactly solved framework for ten puzzles in macro-finance |
| url | http://papers.nber.org/papers/w13724.pdf |
| volume_link | (DE-604)BV002801238 |
| work_keys_str_mv | AT gabaixxavier variableraredisastersanexactlysolvedframeworkfortenpuzzlesinmacrofinance |