Disaster Risk and Asset Returns: An International Perspective

77 Pages Posted: 23 Jan 2017

See all articles by Karen K. Lewis

Karen K. Lewis

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

Edith X. Liu

Federal Reserve Board of Governors

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

Abstract

Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. We show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements.

Suggested Citation

Lewis, Karen Kay and Liu, Edith X., Disaster Risk and Asset Returns: An International Perspective (January 2017). NBER Working Paper No. w23065, Available at SSRN: https://ssrn.com/abstract=2903732

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

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Edith X. Liu

Federal Reserve Board of Governors ( email )

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HOME PAGE: http://https://www.federalreserve.gov/econresdata/edith-x-liu.htm

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