This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918–2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings–price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.
%0 Journal Article
%1 Berkman:JFE:2011
%A Berkman, Henk
%A Jacobsen, Ben
%A Lee, John B.
%D 2011
%J Journal of Financial Economics
%K disaster equity-premium
%N 2
%P 313-332
%R http://dx.doi.org/10.1016/j.jfineco.2011.02.019
%T Time-Varying Rare Disaster Risk and Stock Returns
%U http://www.sciencedirect.com/science/article/pii/S0304405X11000523
%V 101
%X This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918–2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings–price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.
@article{Berkman:JFE:2011,
abstract = {This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918–2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings–price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns. },
added-at = {2014-10-12T19:53:21.000+0200},
author = {Berkman, Henk and Jacobsen, Ben and Lee, John B.},
biburl = {https://www.bibsonomy.org/bibtex/2a2985c09624dd294df1aeec49c6841e7/fcqms},
description = {Time-varying rare disaster risk and stock returns},
doi = {http://dx.doi.org/10.1016/j.jfineco.2011.02.019},
interhash = {0cfc850fdf85554004b5c4884f53c10a},
intrahash = {a2985c09624dd294df1aeec49c6841e7},
issn = {0304-405X},
journal = {Journal of Financial Economics },
keywords = {disaster equity-premium},
number = 2,
pages = {313-332},
timestamp = {2014-10-12T21:38:20.000+0200},
title = {Time-Varying Rare Disaster Risk and Stock Returns },
url = {http://www.sciencedirect.com/science/article/pii/S0304405X11000523},
volume = 101,
year = 2011
}