Rare Booms and Disasters in a Multi-Sector Endowment Economy

87 Pages Posted: 29 Jan 2014

See all articles by Jerry Tsai

Jerry Tsai

University of Oxford - Department of Economics; affiliation not provided to SSRN

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

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Date Written: September 13, 2015

Abstract

Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns. 

 

Suggested Citation

Tsai, Jerry and Wachter, Jessica A., Rare Booms and Disasters in a Multi-Sector Endowment Economy (September 13, 2015). The Wharton School Research Paper No. 43, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2386963 or http://dx.doi.org/10.2139/ssrn.2386963

Jerry Tsai

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3UQ
United Kingdom

affiliation not provided to SSRN

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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Securities and Exchange Commission ( email )

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United States

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