Rare Events and Long-Run Risks

51 Pages Posted: 18 Mar 2017  

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Tao Jin

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2016

Abstract

Rare events (RE) and long-run risks (LRR) are complementary approaches for characterizing macroeconomic variables and for understanding asset pricing. We estimate a model with RE and LRR using long-term consumption data for 42 economies. RE typically associates with major historical episodes, such as world wars and depressions and analogous country-specific events. LRR reflects gradual processes that influence long-run growth rates and volatility. A match between the model and observed average rates of return requires a coefficient of relative risk aversion, γ, around 6. Most of the explanation for the equity premium derives from RE, although LRR makes a moderate contribution.

Keywords: rare events, long-run risks, asset pricing, risk aversion

JEL Classification: G12, G17, E21, E32, E44

Suggested Citation

Barro, Robert J. and Jin, Tao, Rare Events and Long-Run Risks (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2933697 or http://dx.doi.org/10.2139/ssrn.2933697

Robert J. Barro

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-3203 (Phone)

Tao Jin (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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