NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rare Booms and Disasters in a Multi-sector Endowment Economy

Jerry Tsai, Jessica A. Wachter

NBER Working Paper No. 20062
Issued in April 2014, Revised in September 2015
NBER Program(s):Asset Pricing

Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns.

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Document Object Identifier (DOI): 10.3386/w20062

Published: Jerry Tsai, Jessica A. Wachter; Rare Booms and Disasters in a Multisector Endowment Economy, The Review of Financial Studies, Volume 29, Issue 5, 1 May 2016, Pages 1113–1169, https://doi.org/10.1093/rfs/hhv074

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