Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach

73 Pages Posted: 4 Jun 2019 Last revised: 17 Aug 2020

See all articles by Jantje Sönksen

Jantje Sönksen

University of Tübingen

Joachim Grammig

Eberhard Karls Universität Tübingen; Centre for Financial Research (CfR); Center for Financial Studies (CfS)

Date Written: May 15, 2020

Abstract

We propose a simulation-based strategy to estimate and empirically assess a class of asset pricing models that account for rare but severe consumption contractions that can extend over multiple periods. Our approach expands the scope of prevalent calibration studies and tackles the inherent sample selection problem associated with measuring the effect of rare disaster risk on asset prices. An analysis based on postwar U.S. and historical multi-country panel data yields estimates of investor preference parameters that are economically plausible and robust with respect to alternative specifications. The estimated model withstands tests of validity; the model-implied key financial indicators and timing premium have reasonable magnitudes. These findings suggest that the rare disaster hypothesis can help restore the nexus between the real economy and financial markets when allowing for multi-period disaster events. Our methodological contribution is a new econometric framework for empirical asset pricing with rare disaster risk.

Keywords: empirical asset pricing, multi-period disasters, simulation-based estimation

JEL Classification: C58, G12

Suggested Citation

Sönksen, Jantje and Grammig, Joachim, Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3377345 or http://dx.doi.org/10.2139/ssrn.3377345

Jantje Sönksen (Contact Author)

University of Tübingen ( email )

Sigwartstr. 18
Tübingen, Baden-Wuerttemberg 72076
Germany

Joachim Grammig

Eberhard Karls Universität Tübingen ( email )

Mohlstrasse 36
D-72074 Tübingen, 72074
Germany

HOME PAGE: http://www.uni-tuebingen.de/uni/wwo/Grammig/grammigeng.html

Centre for Financial Research (CfR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Center for Financial Studies (CfS) ( email )

Taunusanlage 6
Frankfurt/Germany, D-60329
Germany

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