02413cam a22002657 4500001000700000003000500007005001700012008004100029100002300070245008300093260006600176490004200242500001800284520119700302530006101499538007201560538003601632690008501668690008801753690011201841710004201953830007701995856003802072856003702110w15399NBER20150328202220.0150328s2009 mau||||fs|||| 000 0 eng d1 aGourio, François.10aDisasters Risk and Business Cyclesh[electronic resource] /cFrançois Gourio. aCambridge, Mass.bNational Bureau of Economic Researchc2009.1 aNBER working paper seriesvno. w15399 aOctober 2009.3 aTo construct a business cycle model consistent with the observed behavior of asset prices, and study the effect of shocks to aggregate uncertainty, I introduce a small, time-varying risk of economic disaster in a standard real business cycle model. The paper establishes two simple theoretical results: first, when the probability of disaster is constant, the risk of disaster does not affect the path of macroeconomic aggregates - a "separation theorem" between macroeconomic quantities and asset prices in the spirit of Tallarini (2000). Second, shocks to the probability of disaster, which generate variation in risk premia over time, are observationally equivalent to preference shocks. An increase in the perceived probability of disaster leads to a collapse of investment and a recession, an increase in risk spreads, and a decrease in the yield on safe assets. To assess the empirical validity of the model, I infer the probability of disaster from observed asset prices and feed it into the model. The variation over time in this probability appears to account for a significant fraction of business cycle dynamics, especially sharp downturns in investment and output such as 2008-IV. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE32 - Business Fluctuations • Cycles2Journal of Economic Literature class. 7aE44 - Financial Markets and the Macroeconomy2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15399.4 uhttp://www.nber.org/papers/w1539941uhttp://dx.doi.org/10.3386/w15399