Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach

Jantje Sönksen and Joachim Grammig

No 14-06, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: We propose a simulation-based strategy to estimate and empirically assess a class of asset pricing models that account for rare but severe consumption contractions that can extend over multiple periods. Our approach expands the scope of prevalent calibration studies and tackles the inherent sample selection problem associated with measuring the effect of rare disaster risk on asset prices. An analysis based on postwar U.S. and historical multi-country panel data yields estimates of investor preference parameters that are economically plausible and robust with respect to alternative specifications. The estimated model withstands tests of validity; the model-implied key financial indicators and timing premium all have reasonable magnitudes. These findings suggest that the rare disaster hypothesis can help restore the nexus between the real economy and financial markets when allowing for multi-period disaster events. Our methodological contribution is a new econometric framework for empirical asset pricing with rare disaster risk.

Keywords: empirical asset pricing; multi-period disasters; simulationbased estimation (search for similar items in EconPapers)
JEL-codes: C58 G12 (search for similar items in EconPapers)
Date: 2020, Revised 2020
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/222986/1/cfr-wp14-06rev.pdf (application/pdf)

Related works:
Journal Article: Empirical asset pricing with multi-period disaster risk: A simulation-based approach (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:1406

DOI: 10.2139/ssrn.3377345

Access Statistics for this paper

More papers in CFR Working Papers from University of Cologne, Centre for Financial Research (CFR) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().