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
NBER Program(s):   AP

Why do value stocks have higher expected returns than growth stocks, in spite of 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 directional covariance and skewness and low realized returns.

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Document Object Identifier (DOI): 10.3386/w20062

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