TY  - UNPD
A1  - Grammig, Joachim
A1  - Soenksen, Jantje
T1  - Consumption-based asset pricing with rare disaster risk : a simulated method of moments approach
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 480
N2  - The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensation for unlikely but calamitous risks that they happened not to incur. Although convincing in theory, empirical tests of the rare disaster explanation are scarce. We estimate a disaster-including consumption-based asset pricing model (CBM) using a combination of the simulated method of moments and bootstrapping. We consider several methodological alternatives that differ in the moment matches and the way to account for disasters in the simulated consumption growth and return series. Whichever specification is used, the estimated preference parameters are of an economically plausible size, and the estimation precision is much higher than in previous studies that use the canonical CBM. Our results thus provide empirical support for the rare disaster hypothesis, and help reconcile the nexus between real economy and financial markets implied by the consumption-based asset pricing paradigm.
T3  - CFS working paper series - 480 
KW  - equity premium
KW  - rare disaster risk
KW  - asset pricing
KW  - simulated method of moments
Y1  - 2014
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/35114
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-351140
IS  - September 19, 2014
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -