Open AccessRare Booms and Disasters in a Multisector Endowment Economy
Author(s) -
Jerry Tsai,
Jessica A. Wachter
Publication year - 2015
Publication title -
review of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 12.8
H-Index - 190
eISSN - 1465-7368
pISSN - 0893-9454
DOI - 10.1093/rfs/hhv074
Subject(s) - economics , volatility (finance) , boom , growth stock , equity premium puzzle , equity (law) , skewness , endowment , financial economics , econometrics , equity value , stock market , monetary economics , capital asset pricing model , geography , macroeconomics , debt , environmental engineering , debt levels and flows , archaeology , philosophy , context (archaeology) , epistemology , political science , external debt , market maker , law , engineering
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-event-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.
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