Rare disaster risk and the expected equity risk premium |
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| Authors: | Henk Berkman Ben Jacobsen John B Lee |
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| Affiliation: | 1. Department of Accounting and Finance, University of Auckland Business School, Auckland, New Zealand;2. Accounting and Finance Group, University of Edinburgh Business School, Edinburgh, UK |
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| Abstract: | Consistent with the predictions of rare disaster models, we find that a proxy for the time‐varying probability of rare disasters helps to explain fluctuations in expectations of the equity risk premium. Our proxy for disaster risk is a recently developed measure of global political instability, and the expected market risk premium is from Value Line analysts' expected stock returns. Consistent with long‐run risk models, uncertainty about expected GDP growth and expected consumption growth is also significantly positively related to the expected market risk premium. We obtain similar results when we use the earnings–price ratio and the dividend–price ratio as proxies for the expected market risk premium. |
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| Keywords: | Consumption risk Equity premium International political crises Market risk premium Rare disasters |
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