On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Learning, Rare Disasters, and Asset Prices
Yang Lu
Michael Siemer
Abstract

In this paper, we examine how learning about disaster risk affects asset pricing in an endowment economy. We extend the literature on rare disasters by allowing for two sources of uncertainty: (1) the lack of historical data results in unknown parameters for the disaster process, and (2) the disaster takes time to unfold and is not directly observable. The model generates time variation in the risk premium through Bayesian updating of agents' beliefs regarding the likelihood and severity of disaster realization. The model accounts for the level and volatility of U.S. equity returns and generates predictability in returns.


Download Full text
Cite this item
Yang Lu & Michael Siemer, Learning, Rare Disasters, and Asset Prices, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2013-85, 01 Nov 2013.
More from this series
JEL Classification:
Subject headings:
Keywords: Rare disasters; Bayesian learning; equity premium puzzle; time-varying risk premia; return predictability
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal