Jerry Tsai

Department of Economics
University of Oxford
Manor Road Building
Oxford, OX1 3UQ

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NBER Working Papers and Publications

February 2015Disaster Risk and its Implications for Asset Pricing
with Jessica A. Wachter: w20926
After laying dormant for more than two decades, the rare disaster framework has emerged as a leading contender to explain facts about the aggregate market, interest rates, and financial derivatives. In this paper we survey recent models of disaster risk that provide explanations for the equity premium puzzle, the volatility puzzle, return predictability and other features of the aggregate stock market. We show how these models can also explain violations of the expectations hypothesis in bond pricing, and the implied volatility skew in option pricing. We review both modeling techniques and results and consider both endowment and production economies. We show that these models provide a parsimonious and unifying framework for understanding puzzles in asset pricing.

Published: Jerry Tsai & Jessica A. Wachter, 2015. "Disaster Risk and Its Implications for Asset Pricing," Annual Review of Financial Economics, vol 7(1), pages 219-252.

April 2014Rare Booms and Disasters in a Multi-sector Endowment Economy
with Jessica A. Wachter: w20062
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.

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,

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