Bianchi, Francesco (2008): Rare Events, Financial Crises, and the Cross-Section of Asset Returns.
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This paper shows that rare events are important in explaining the cross section of asset returns because of their role in shaping agents' expectations. I reconsider the "bad beta, good beta" ICAPM proposed by Campbell and Vuolteenaho and I point out that the explanatory power of the model relies on including the stock market crash that opened the Great Depression. When using a Markov-switching VAR, a '30s regime is identified. This regime receives a large weight when forming expectations consistent with the ICAPM, suggesting that the way agents think about financial markets is shaped by what happens during extreme circumstances. From a technical point of view, the paper extends the present value decomposition of Campbell and Shiller to allow for Markov-switching dynamics in the law of motion of the state variables. This approach could shed new light on the sensitivity of the present value decomposition methodology to the sample choice.
|Item Type:||MPRA Paper|
|Original Title:||Rare Events, Financial Crises, and the Cross-Section of Asset Returns|
|Keywords:||Markov-switching, Rare Events, Bayesian, Asset Pricing|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G0 - General > G01 - Financial Crises
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General
|Depositing User:||Francesco Bianchi|
|Date Deposited:||21. Feb 2010 18:33|
|Last Modified:||14. Mar 2015 06:13|
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