Rare Disasters and Risk Sharing with Heterogeneous Beliefs
Hui Chen, Scott Joslin, Ngoc-Khanh Tran
Although the threat of rare economic disasters can have large effect on asset prices, difficulty in inference regarding both their likelihood and severity provides the potential for disagreements among investors. Such disagreements lead investors to insure each other against the types of disasters each one fears the most. Due to the highly nonlinear relationship between consumption losses in a disaster and the risk premium, a small amount of risk sharing can significantly attenuate the effect that disaster risk has on the equity premium. We characterize the sensitivity of risk premium to wealth distribution analytically. Our model shows that time variation in the wealth distribution and the amount of disagreement across agents can both lead to significant variation in disaster risk premium. It also highlights the conditions under which disaster risk premium will be large, namely when disagreement across agents is small or when the wealth distribution is highly concentrated in agents fearful of disasters. Finally, the model predicts an inverse U-shaped relationship between the equity premium and the size of the disaster insurance market
Year of publication: |
May 2010
|
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Authors: | Chen, Hui |
Other Persons: | Tran, Ngoc-Khanh (contributor) ; Joslin, Scott (contributor) |
Institutions: | National Bureau of Economic Research (contributor) |
Publisher: |
Cambridge, Mass : National Bureau of Economic Research |
Subject: | Theorie | Theory | Wirtschaftskrise | Economic crisis | Risikoprämie | Risk premium | Schock | Shock | Entscheidung unter Risiko | Decision under risk | Risiko | Risk | Kapitalanlage | Financial investment |
Saved in:
freely available
Extent: | 1 Online-Ressource |
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Series: | NBER working paper series ; no. w16035 |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Mode of access: World Wide Web System requirements: Adobe [Acrobat] Reader required for PDF files Hardcopy version available to institutional subscribers. |
Other identifiers: | 10.3386/w16035 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012462617
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