We estimate an empirical model of consumption disasters using new
data on consumption for 24 countries over more than 100 years, and
study its implications for asset prices. The model allows for partial
recoveries after disasters that unfold over multiple years. We
find that roughly half of the drop in consumption due to disasters
reversed. Our model generates a sizable equity premium
from disaster risk, but one that is substantially smaller than
in simpler models. It implies that a large value of the intertemporal
elasticity of substitution is necessary to explain stock-market crashes
at the onset of disasters.
Nakamura, Emi, Jón Steinsson, Robert Barro, and José Ursúa.
"Crises and Recoveries in an Empirical Model of Consumption Disasters."
American Economic Journal: Macroeconomics,
Macroeconomics: Consumption; Saving; Wealth
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
Asset Pricing; Trading volume; Bond Interest Rates
Information and Market Efficiency; Event Studies