TY  - JOUR
AU  - Wachter,Jessica
TI  - Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14386
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14386
L1  - http://www.nber.org/papers/w14386.pdf
N1  - Author contact info:
Jessica Wachter
Department of Finance
2300 SH-DH
The Wharton School
University of Pennsylvania
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-7634
Fax: 215/898-6200
E-Mail: jwachter@wharton.upenn.edu
AB  - Why is the equity premium so high, and why are stocks so volatile? Why are stock returns in excess of government bill rates predictable? This paper proposes an answer to these questions based on a time-varying probability of a consumption disaster. In the model, aggregate consumption follows a normal distribution with low volatility most of the time, but with some probability of a consumption realization far out in the left tail. The possibility of this poor outcome substantially increases the equity premium, while time-variation in the probability of this outcome drives high stock market volatility and excess return predictability.
ER  -