Rare disaster risk and the expected equity risk premium

Henk Berkman, Ben Jacobsen, John B. Lee

Research output: Contribution to journalArticlepeer-review


Consistent with the predictions of rare disaster models, we find that a proxy for the time-varying probability of rare disasters helps to explain fluctuations in expectations of the equity risk premium. Our proxy for disaster risk is a recently developed measure of global political instability, and the expected market risk premium is from Value Line analysts’ expected stock returns. Consistent with long run risk models, uncertainty about expected GDP growth and expected consumption growth are also significantly positively related to the expected market risk premium. We obtain similar results when we use the earnings-price ratio and the dividend-price ratio as proxies for the expected market risk premium.
Original languageEnglish
Pages (from-to)1 - 22
JournalAccounting and Finance
Early online date13 Aug 2015
Publication statusE-pub ahead of print - 13 Aug 2015


  • Equity premium
  • Rare disasters
  • Consumption risk
  • International political crises
  • Market risk premium


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