TY - JOUR AU - Lewis, Karen K AU - Liu, Edith X TI - Disaster Risk and Asset Returns: An International Perspective JF - National Bureau of Economic Research Working Paper Series VL - No. 23065 PY - 2017 Y2 - January 2017 DO - 10.3386/w23065 UR - http://www.nber.org/papers/w23065 L1 - http://www.nber.org/papers/w23065.pdf N1 - Author contact info: Karen K. Lewis Department of Finance, Wharton School 2300 SHDH University of Pennsylvania Philadelphia, PA 19104-6367 Tel: 215/898-7637 Fax: 215/898-6200 E-Mail: lewisk@wharton.upenn.edu Edith Liu Federal Reserve Board of Governors 20st & Constitution Ave NW Washington, DC 20551 Tel: 2024523913 E-Mail: edith.x.liu@frb.gov M1 - published as Karen K. Lewis, Edith X. Liu. "Disaster Risk and Asset Returns: An International Perspective," in Richard Clarida, Lucrezia Reichlin, and Michael Devereux, organizers, "NBER International Seminar on Macroeconomics 2016" Journal of International Economics, Volume 108, Supp. 1 (Elsevier) (2017) M3 - presented at "International Seminar on Macroeconomics - Hosted by Sofia University", June 24-25, 2016 AB - Recent studies have shown that disaster risk can generate asset return moments similar to those observed in the U.S. data. However, these studies have ignored the cross-country asset pricing implications of the disaster risk model. This paper shows that standard U.S.-based disaster risk model assumptions found in the literature lead to counterfactual international asset pricing implications. Given consumption pricing moments, disaster risk cannot explain the range of equity premia and government bill rates nor the high degree of equity return correlation found in the data. Moreover, the independence of disasters presumed in some studies generates counterfactually low cross-country correlations in equity markets. Alternatively, if disasters are all shared, the model generates correlations that are excessively high. We show that common and idiosyncratic components of disaster risk are needed to explain the pattern in consumption and equity co-movements. ER -