Rare Events, Financial Crises, and the Cross-Section of Asset Returns
43 Pages Posted: 19 Apr 2010 Last revised: 17 Mar 2015
There are 4 versions of this paper
Rare Events, Financial Crises, and the Cross-Section of Asset Returns
Rare Events, Financial Crises, and the Cross-Section of Asset Returns
The Great Depression and the Great Recession: A View from Financial Markets
Rare Events, Financial Crises, and the Cross-Section of Asset Returns
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: Suggested Citation
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