Rare Booms and Disasters in a Multi-Sector Endowment Economy

87 Pages Posted: 21 Apr 2014

See all articles by Jerry Tsai

Jerry Tsai

Pacific Investment Management Company (PIMCO); University of Oxford - Department of Economics

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

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Date Written: April 2014

Abstract

Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns.

Suggested Citation

Tsai, Jerry and Wachter, Jessica A., Rare Booms and Disasters in a Multi-Sector Endowment Economy (April 2014). NBER Working Paper No. w20062, Available at SSRN: https://ssrn.com/abstract=2427165

Jerry Tsai (Contact Author)

Pacific Investment Management Company (PIMCO) ( email )

United States

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3UQ
United Kingdom

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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