Time-varying rare disaster risk and stock returns

Henk Berkman, Ben Jacobsen*, John B. Lee

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This study provides empirical support for theoretical models that allow for time-varying rare disaster risk. Using a database of 447 international political crises during the period 1918-2006, we create a crisis index that shows substantial variation over time. Changes in this crisis index, our proxy for changes in perceived disaster probability, have a large impact on both the mean and volatility of world stock market returns. Crisis risk is positively correlated with the earnings-price ratio and the dividend yield. Cross-sectional tests also show that crisis risk is priced: Industries that are more crisis risk sensitive yield higher returns.

Original languageEnglish
Pages (from-to)313-332
Number of pages20
JournalJournal of Financial Economics
Issue number2
Publication statusPublished - 1 Aug 2011


  • Consumption
  • Equity premium
  • International political crises
  • Rare disasters
  • Volatility


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