Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172467
Authors: 
Koulovatianos, Christos
Li, Jian
Weber, Fabienne
Year of Publication: 
2017
Series/Report no.: 
CFS Working Paper Series 589
Abstract: 
After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after the Lehman-Brothers collapse. To explain this paradox, we suggest that, in the post-Lehman-Brothers period, investors changed their perceptions on disasters, thinking that disasters occur once every 30 years on average, instead of disasters occurring once every 60 years. In our asset-pricing calibration exercise, this rise in perceived market fragility alone can explain the drop in both bond rates and price-dividend ratios observed after the Lehman-Brothers collapse, which indicates that markets mostly demanded bonds instead of stocks.
Subjects: 
asset pricing
disaster risk
price-dividend ratio
bond returns
JEL: 
G12
G01
E44
E43
Document Type: 
Working Paper

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