Disaster Risk and Asset Returns: An International Perspective
Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. We show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements.
Published Versions
Disaster Risk and Asset Returns: An International Perspective, Karen K. Lewis, Edith X. Liu. in NBER International Seminar on Macroeconomics 2016, Clarida, Reichlin, and Devereux. 2017
Karen K. Lewis & Edith X. Liu, 2017. "Disaster risk and asset returns: An international perspective," Journal of International Economics, vol 108, pages S42-S58. citation courtesy of