Rare Events, Financial Crises, and the Cross-Section of Asset Returns

43 Pages Posted: 19 Apr 2010 Last revised: 17 Mar 2015

See all articles by Francesco Bianchi

Francesco Bianchi

Johns Hopkins University; NBER; CEPR

Multiple version iconThere are 4 versions of this paper

Date Written: March 1, 2015

Abstract

Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. Small growth stocks tend to perform relatively better during financial crises. This helps to explain the cross section of asset returns when risk is priced according to a version of the "Bad Beta, Good Beta" Intertemporal CAPM that allows for regime changes.

Keywords: G01, G12, C32

JEL Classification: Great Depression, Great Recession, …financial crises, Intertemporal CAPM, Markov-switching VAR

Suggested Citation

Bianchi, Francesco, Rare Events, Financial Crises, and the Cross-Section of Asset Returns (March 1, 2015). Economics Research Initiatives at Duke (ERID) Working Paper No. 41, Available at SSRN: https://ssrn.com/abstract=1592556 or http://dx.doi.org/10.2139/ssrn.1592556

Francesco Bianchi (Contact Author)

Johns Hopkins University ( email )

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NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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CEPR ( email )

London
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