Details
| Original language | English |
|---|---|
| Pages (from-to) | 805-832 |
| Number of pages | 28 |
| Journal | Journal of econometrics |
| Volume | 222 |
| Issue number | 1 |
| Early online date | 8 Sept 2020 |
| Publication status | Published - May 2021 |
| Externally published | Yes |
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, Simulation-based estimation
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of econometrics, Vol. 222, No. 1, 05.2021, p. 805-832.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Empirical Asset Pricing with Multi-Period Disaster Risk
T2 - A Simulation-Based Approach
AU - Sönksen, Jantje
AU - Grammig, Joachim
N1 - Publisher Copyright: © 2020 The Author(s)
PY - 2021/5
Y1 - 2021/5
N2 - 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.
AB - 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.
KW - Empirical asset pricing
KW - Multi-period disasters
KW - Simulation-based estimation
UR - http://www.scopus.com/inward/record.url?scp=85090479627&partnerID=8YFLogxK
U2 - 10.2139/ssrn.3377345
DO - 10.2139/ssrn.3377345
M3 - Article
AN - SCOPUS:85090479627
VL - 222
SP - 805
EP - 832
JO - Journal of econometrics
JF - Journal of econometrics
SN - 0304-4076
IS - 1
ER -