Financial Markets in the Face of the Apocalypse

Bialkowski, Jedrzej Pawel; Ronn, Ehud I.

doi:10.2139/ssrn.2620874

Financial Markets in the Face of the Apocalypse

57 Pages Posted: 21 Jun 2015 Last revised: 29 Jun 2016

See all articles by Jedrzej Pawel Bialkowski

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Date Written: April 25, 2016

Abstract

This paper brings together two strands of the literature: Quantifying the impact of apocalyptic risk on capital markets, and the correct computation of the equity risk premium. For the former, we use events in four countries during the Second World War to discern markets' incorporation of information regarding the probability of an Armageddon for each country.

We argue that past computations equity risk premium did not properly account for the financial implications of political collapse on property/civil/human rights. Accordingly, we show that past calculations overstated the equity risk premium. We provide an estimate of the equity risk premium that is corrected for lack of basic rights, demonstrating the important changes in this estimate over time.

Keywords: Rare events, Black swan events, Equity premium, International political crises, Property rights, Civil and human rights, World War II

JEL Classification: G11, G12, G15

Suggested Citation: Suggested Citation

Bialkowski, Jedrzej Pawel and Ronn, Ehud I., Financial Markets in the Face of the Apocalypse (April 25, 2016). Available at SSRN: https://ssrn.com/abstract=2620874 or http://dx.doi.org/10.2139/ssrn.2620874