Disaster Risk and Asset Returns: An International Perspective

No 23065, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. We show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements.

JEL-codes: F3 F4 G1 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-ifn
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Published as Disaster Risk and Asset Returns: An International Perspective , Karen K. Lewis, Edith X. Liu. in NBER International Seminar on Macroeconomics 2016 , Clarida, Reichlin, and Devereux. 2017
Published as Karen K. Lewis & Edith X. Liu, 2017. "Disaster risk and asset returns: An international perspective," Journal of International Economics, vol 108, pages S42-S58.

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Journal Article: Disaster risk and asset returns: An international perspective (2017)
Working Paper: Disaster Risk and Asset Returns: An International Perspective (2017)
Chapter: Disaster Risk and Asset Returns: An International Perspective (2016)
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