Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/338327 
Year of Publication: 
2026
Series/Report no.: 
CESifo Working Paper No. 12231
Version Description: 
This Version: March 2026
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
This paper develops a tractable consumption-based asset-pricing model in an i.i.d. economy that combines rare consumption disasters with ambiguity aversion implemented as a one-period entropic tilt under CRRA utility. Closed-form expressions for the risk-free rate, equity return moments, and the variance risk premium deliver a sufficient-statistics, block-recursive identification: market moments pin down the effective one-period risk loading and the "crash beta" mapping consumption disasters into equity crashes, while detection-error probabilities discipline the size of the entropic tilt, thereby pinning down curvature and discounting separately. An invariance result follows: implied crash exposure is independent of the chosen detection-error benchmark once targeted moments are fixed. Calibrated to U.S. long-run returns and option-implied variance risk premia, the model matches the high equity premium and low real risk-free rate with modest curvature and generates realistic crash-insurance prices, a downward-sloping implied-volatility skew, and the empirical anatomy of the equity premium.
Subjects: 
equity premium puzzle
risk-free rate puzzle
rare disasters
robust control
JEL: 
G12
E44
E21
D81
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.