Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/280552 
Year of Publication: 
2016
Series/Report no.: 
AEI Economics Working Paper No. 2016-16
Publisher: 
American Enterprise Institute (AEI), Washington, DC
Abstract: 
Rare events (RE) and long-run risks (LRR) are complementary approaches for characterizing macroeconomic variables and for understanding asset pricing. We estimate a model with RE and LRR using long-term consumption data for 42 economies. RE typically associates with major historical episodes, such as world wars and depressions and analogous country-specific events. LRR reflects gradual processes that influence long-run growth rates and volatility. A match between the model and observed average rates of return requires a coefficient of relative risk aversion, γ, around 6. Most of the explanation for the equity premium derives from RE, although LRR makes a moderate contribution.
Subjects: 
macroeconomics
JEL: 
A
Document Type: 
Working Paper

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