A disaster explanation of equity term structures

This article extends the rare disaster framework by introducing a model with a time‐varying disaster recovery feature. The model yields closed‐form pricing formulas for stocks and dividend strips. Calibrated using international disaster data, it quantitatively captures both the unconditional and conditional term structures of equity risk premia. It replicates key empirical patterns, including a downward-sloping unconditional term structure of one-period returns and a countercyclical conditional slope, and generates novel predictions for capital asset pricing model beta, alpha, and price. © The Author(s) 2025. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved.