Journal of Financial Economics Vol. 101 No. 2 2011
Time-varying rare disaster risk and stock returns
Abstract
This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918–2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings–price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.
- DOI
- 10.1016/j.jfineco.2011.02.019
- Volume
- 101
- Issue
- 2
- Pages
- 313-332
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref