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Rare events and long-run risks

Author

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  • Robert J. Barro

    (American Enterprise Institute)

  • Tao Jin
Abstract
Rare events (RE) and long-run risks (LRR) are complementary approaches for characterizing macroeconomic variables and for understanding asset pricing. We estimate a model with RE and LRR using long-term consumption data for 42 economies. RE typically associates with major historical episodes, such as world wars and depressions and analogous country-specific events. LRR reflects gradual processes that influence long-run growth rates and volatility. A match between the model and observed average rates of return requires a coefficient of relative risk aversion, γ, around 6. Most of the explanation for the equity premium derives from RE, although LRR makes a moderate contribution.

Suggested Citation

  • Robert J. Barro & Tao Jin, 2016. "Rare events and long-run risks," AEI Economics Working Papers 905253, American Enterprise Institute.
    • Handle: RePEc:aei:rpaper:905253
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