Can Time-Varying Recovery of Rare Disasters Explain Equity Term Structure?

Project: Research

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Description

I propose a disaster model in which the time variation comes from the speed of post disaster recovery. This model generates sizable and time varying equity risk premium. More importantly, this model quantitatively matches the two recent findings on the equity term structure, namely (1) the unconditional slope is downward and (2) the conditional level and slope are countercyclical. This model is very tractable and allows for extension into a cross sectional study of many stocks, or into a macro economy with production. It has the potential of becoming be the third workable disaster-based asset pricing framework, along with the time varying probability model of Wachter (2013) and the time varying impact model of Gabaix (2012). 

Detail(s)

Project number9048192
Grant typeECS
StatusNot started
Effective start/end date1/01/21 → …