Multiple Trees Subject to Event Risk
59 Pages Posted: 8 Feb 2009 Last revised: 30 Jun 2009
Date Written: June 29, 2009
We study an equilibrium asset pricing model with several Lucas (1978) trees subject to event risk, that is, the possibility that trees experience unexpected disasters. We exploit the market clearing mechanism, in the presence of multiple positive net supply assets, to show that the implications of disasters for some cash-flows extend to the valuation of seemingly unrelated ones. Price-dividend ratios, risk premia, credit-spreads depend on the share of aggregate supply of each tree, but the endogeneity of risk neutral probabilities of disaster implies that the asset pricing implications of event risk go beyond the effects analyzed by the 'multiple tree' literature so far.
Keywords: general equilibrium, event risk, disaster premia, credit-spread
JEL Classification: G12, G13, D51
Suggested Citation: Suggested Citation