Measuring Time-Varying Disaster Risk : An Empirical Analysis of 'Dark Matter' in Asset Prices

To confront the challenge that disaster risk is “dark matter” in finance, we construct an objective measure of disaster risk, which is able to predict half of GDP crashes in a sample of 20 advanced economies between 1870 and 2021. Despite this significant predictability, we find no supportive, and often contradictory, evidence of higher predicted disaster risk being associated with a higher equity premium, volatility, or dividend/price ratio of the equity market index; higher corporate bond spreads, or higher term spreads. Our results suggest that the subjective disaster risk mirrored by asset prices lags objective disaster risk by two years