Multiple Trees Subject to Event Risk

59 Pages Posted: 8 Feb 2009 Last revised: 30 Jun 2009

See all articles by Paolo Porchia

Paolo Porchia

IE Business School

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: June 29, 2009

Abstract

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

Porchia, Paolo and Trojani, Fabio, Multiple Trees Subject to Event Risk (June 29, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1339595 or http://dx.doi.org/10.2139/ssrn.1339595

Paolo Porchia (Contact Author)

IE Business School ( email )

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Madrid, 28006
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HOME PAGE: http://paolo-porchia.profesores.ie.edu/

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

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