the mean and volatility of equity returns. Our model assumes a small risk of a rare disaster that is calibrated based on … the international data on large consumption declines. We allow the risk of this rare disaster to be stochastic, which …

risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative … difference between the power-law tail parameter and the coefficient of relative risk aversion, γ. The options-pricing formula …

tractability. Nevertheless, the formula is useful for evaluating many types of risk …

the put spread cannot be attributed to an increase in idiosyncratic risk because the correlation of stock returns … increased during the crisis. The government's collective guarantee partially absorbs financial sector-wide tail risk, which … the bailout guarantee during the crisis. The model solves the problem of how to measure systemic risk in a world where the …