I am thrilled to announce that my second working paper titled „Asset Pricing with Clustered, Controllable Disasters“ (joint work with Holger Kraft, Claus Munk and Farina Weiss) is available online on SSRN.
In this paper, we develop a representative agent asset pricing model with tractable self-exciting consumption disasters. Compared to models with a constant disaster probability, our model increases the risk of consecutive shocks causing a large consumption drop over several years, as observed empirically. We introduce the possibility of controlling the magnitude or the probability of disasters through costly interventions. When calibrated to OECD data, the model matches the dynamics of economic disasters, the first three unconditional moments of consumption growth, the riskfree rate, the equity premium, and the stock market’s price-dividend ratio using reasonable preference parameters and moderate jump sizes.
