I am thrilled to announce that the last chapter „Long-Run Risk and Rare Disasters: Quo Vadis Asset Pricing?“ of my PhD thesis titled „Essays on Asset Pricing and Behavioral Economics“ is now available on SSRN.
In this survey article I review the literature on long-run risk and rare disaster risk models in asset pricing. Both frameworks have the ability to provide explanations for various asset pricing puzzles. However, both frameworks have been criticized for their lack of ability to match consumption and dividend dynamics. To address this criticism and to explain more stylized facts from the empirical asset pricing literature such as the impact of climate change on asset prices, new approaches have been developed in recent years. These approaches can be interpreted as combinations of long-run risk models and rare disaster risk blurring the lines between those classical asset pricing frameworks. I also propose a unified framework for physical climate risk in asset pricing that borrows from the disaster risk and the long-run risk literature.
