Business Intelligence

Asset Pricing With Spirit Of Capitalism In A Rare Disaster Framework

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Executive Summary

The equity premium puzzle is celebrating its silver jubilee this year! And it is not because of lack of efforts on the part of economists. Diverse approaches - nonstandard preferences, transaction costs, investor heterogeneity, lower tail risk, learning etc. - have been employed to resolve the puzzle from different perspectives. Current research trends suggest the emergence of rare disaster framework as one of the most promising paradigms for explaining the equity premium puzzle and other related asset pricing puzzles. This paper seeks to explain the puzzles by developing an asset pricing model that extends the rare disaster framework developed by Reitz (1988), Barro (2006, 2009), and Barro & Ursua (2008).

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