Heterogeneous Beliefs about Rare Event Risk in the Lucas Orchard

Piatti, Ilaria (2015) Heterogeneous Beliefs about Rare Event Risk in the Lucas Orchard. Saïd Business School Working Paper.

[img]
Preview
PDF (Working paper)
Download (2MB) | Preview
[img]
Preview
PDF (Appendix to working paper)
Download (333kB) | Preview

Abstract

This paper investigates the asset pricing implications of investor disagreement about the likelihood of a systematic disaster. I specify a general equilibrium model with multiple trees and heterogeneous beliefs about rare event risk, to understand how risk-sharing mechanisms affect equity and variance risk premia, at an aggregate
level and in the cross-section of stock returns. I identify a state dependent link between equity and variance premia, that changes with the distribution of agent consumption. Empirically, as in the model, the variance premium’s predictive power for future excess returns is greater during times of financial distress, mainly for small
stocks.

Item Type: Oxford Saïd Research Paper
Keywords: heterogeneous beliefs, systemic disasters, Lucas orchard, variance risk premium, correlation risk premium, predictability, finance
Subject(s): Finance
Date Deposited: 26 Mar 2015 14:46
Last Modified: 26 Oct 2018 15:48
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5269

View statistics

Actions (login required)

Edit View Edit View