Disaster risk and asset returns: An international perspective

Abstract

For useful comments and suggestions, we thank Charles Engel, Mick Devereux, an anonymous referee, and participants at the 2016 International Seminar on Macroeconomics, the International Conference on Capital Markets at INSEAD, and the Wharton International Finance group meeting. We are also indebted to Jessica Wachter for helpful conversations, and to Robert Barro for providing us with the asset return data. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Board. Any errors or omissions are our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Effects of COVID-19 on Global Financial Markets: Evidence from Qualitative Research for Developed and Developing Economies

“…The major findings reveal that even small banks effectively smooth shocks, even without access to national or global capital markets. Lewis and Liu (2017) investigated the relationship between disaster risk and asset returns. They found a significant negative impact of disaster risk on equity markets.…”

Asset pricing and energy consumption risk

“…By featuring a small but highly persistent systematic consumption risk component measured over long horizons, the long-run risk models have found success with regard to explaining the equity premium puzzle, the cross-sectional dispersion in average stock returns and several market anomalies (Bansal, 2007;Ferson et al, 2013). Related research also investigates rare disasters (Barro, 2006;Lewis and Liu, 2017) or downside risks in the stochastic consumption model (Delikouras, 2017;Delikouras and Kostakis, 2019).…”

The role of time‐varying rare disaster risks in predicting bond returns and volatility

“…A strand of literature dealing with asset pricing, motivated by the failure of existing theoretical pricing models to replicate the movements in assets in the data, has focused on time‐varying disaster risks as a factor that can explain the returns and volatility observed in financial markets (see e.g., Barro, , ; Barro & Jin, ; Barro & Ursúa, , , ; Farhi & Gabaix, ; Gabaix, ; Gourio, ,b, ; Lewis & Liu, ; Nakamura et al., ; Rietz, ; Wachter, ). While Gourio () argues that an increase in the probability of a disaster creates a collapse of investment and consequently drives the risk of a recession, Wachter () relates the time‐varying risk of rare disasters to consumption shocks, which in turn drives returns and volatility in asset markets.…”

“…Following the early work of Rietz (), a growing number of calibrated theoretical models have recently provided evidence of the ability of rare disaster risks in affecting movements (returns and volatility) of asset prices (see e.g., Barro, , ; Barro & Jin, ; Barro & Ursúa, , , ; Farhi & Gabaix, ; Gabaix, ; Gourio, ,b, ; Lewis & Liu, ; Nakamura, Steinsson, Barro, & Ursúa, ; Wachter, ).…”