DOCSLIB.ORG

Economic and Welfare Impacts of Disasters in East Asia 1 and Policy Responses Yasuyuki Sawada and Sothea Oum

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Economic and Welfare Impacts of Disasters in East Asia 1 and Policy Responses Yasuyuki Sawada and Sothea Oum ERIA Research Project Report 2011, No.8 EECONOMIC AND WWELFARE IIMPACTS OF DDISASTERS IN EEAST AASIA AND PPOLICY RRESPONSES Edited by YASUYUKI SAWADA SOTHEA OUM ERIA Research Project Report 2011, No.8 EECONOMIC AND WWELFARE IIMPACTS OF DDISASTERS IN EEAST AASIA AND PPOLICY RRESPONSES Edited by YASUYUKI SAWADA SOTHEA OUM December, 2012 TABLE OF CONTENTS Table of Contents i List of Project Members iv Acknowledgement vi Executive Summary vii Economic and Welfare Impacts of Disasters in East Asia 1 and Policy Responses Yasuyuki Sawada and Sothea Oum Part I. Overall Ex-Ante Risk Management and Ex-Post Risk-Coping Mechanisms against Disasters at Community, National, and Regional Levels Chapter 1 . Approaches towards Effective Disaster Risk Coping Strategy and Regional Cooperation on Disaster 27 Management Yasuyuki Sawada Chapter 2. Natural Disaster and Economic Policy for ASEAN and the Pacific Rim: A Proposal for a Disaster Risk Reduction 45 ‘Seal of Approval’ Fund Ilan Noy Chapter 3. On the Design of Regional Insurance Schemes/ 71 Mechanisms for East Asia Hiroyuki Nakata Chapter 4. Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Asian 95 Countries Sommarat Chantarat, Krirk Pannangpetch, Nattapong Puttanapong, Preesan Rakwatin and Thanasin Tanompongphandh i Chapter 5. Social Capital in Post Disaster Recovery: Towards a 157 Resilient and Compassionate East Asian Community Daniel P. Aldrich Part II. Household Level Welfare Impacts of Disasters Chapter 6. Impact of Disasters and Role of Social Protection in 179 Natural Disaster Risk Management in Cambodia Sann Vathana, Sothea Oum, Ponhrith Kan, and Colas Chervier Chapter 7. Economic and Welfare Impacts of Disasters in East Asia 205 and Policy Responses: The Case of Vietnam Le Dang Trung Chapter 8. Impact of the 2011 Floods, and Flood Management in 247 Thailand Nipon Poapongsakorn and Pitsom Meethom Part III. Disaster Impacts on Production Networks, Urban Management, and Aggregate Regional Economies Chapter 9. Impacts of Recent Crises and Disasters on Regional 311 Production/Distribution Networks and Trade in Japan Mitsuyo Ando Chapter 10. Impact of Natural Disasters on Production Networks and 343 Urbanization in New Zealand Brent Layton Chapter 11. Long-run Economic Impacts of Thai Flooding: 401 Geographical Simulation Analysis Ikumo Isono and Satoru Kumagai Part IV. Disaster Impacts on Health Chapter 12. Mental Health Impacts of Disasters in India: Ex-Ante and 425 Ex-Post Analysis Sujata Satapathy ii Chapter 13. Impact of Disasters and Disaster Risk Management in Singapore: A Case Study of Singapore’s Experience in 463 Fighting the SARS Epidemic Allen Yu-Hung Lai and Seck L. Tan Part V. Disaster Management in Agricultural Development, Food Securities, and Environmental Sustainability Chapter 14. Impacts of Disasters and Disaster Risk Management in 503 Malaysia: The Case of Floods Ngai Weng Chan Chapter 15. Impacts of Natural Disasters on Agriculture, Food Security, and Natural Resources and Environment in the 553 Philippines Danilo C. Israel and Roehlano M. Briones Chapter 16. Emerging ‘Agricultural Involution’ in Indonesia: Impact of Natural Hazards and Climate Extremes on Agricultural 601 Crops and Food System Jonatan A. Lassa Chapter 17. Impacts of Natural Disasters and Disasters Risk Management in China: The Case of China’s Experience in 641 Wenchuan Earthquake Yi-Ming Wei, Ju-Liang Jin and Qiong Wang iii LIST OF PROJECT MEMBERS PROF. FUKUNARI KIMURA (PROJECT SUPERVISOR): Chief Economist, Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia. PROF. YASUYUKI SAWADA (PROJECT LEADER): Professor, Faculty of Economics, The University of Tokyo, Japan. DR. SOTHEA OUM (PROJECT COORDINATOR): Economist, Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia. PROF. HIROYUKI NAKATA: Fellow, Research Institute of Economy, Trade and Industry, and Researcher, University of Tokyo. PROF. CHAN NGAI WENG: Professor, Universiti Sains Malaysia, Penang, Malaysia. PROF. ILAN NOY: Associate Professor of Economics, University of Hawaii, Manoa, Honolulu, U.S.A. DR. SANN VATHANA: Deputy Secretary General, Council of Ministers, Council for Agricultural and Rural Development, Social Protection Coordination Unit (CARD- SPCU), Phnom Penh, Cambodia. MR. PONHRITH KAN: Social Research Junior Assistant, Council for Agricultural and Rural Development, Social Protection Coordination Unit (CARD-SPCU), Phnom Penh, Cambodia. MR. COLAS CHERVIER: Senior Researcher, Council for Agricultural and Rural Development, Social Protection Coordination Unit, Cambodia (CARD-SPCU), Phnom Penh, Cambodia. PROF. YI-MING WEI: Director, Center for Energy and Environmental Policy Research, Beijing Institute of Technology (BIT), Beijing, China. MS. QIONG WANG: Research Assistant, Center for Energy and Environmental Policy Research, Beijing Institute of Technology (BIT), Beijing, China. PROF. JU-LIANG: Professor, School of Civil Engineering, Hefei University of Technology, Hefei, China. DR. SUJATA SATAPATHY: Assistant Professor, Clinical Psychology, Dept of Psychiatry, All India Institute of Medical Science (AIIMS), New Delhi, India. DR. JONATHAN A. LASSA: Senior Research Fellow, Institute of Resource Governance and Social Change and Associate Research Fellow, Risk Frontiers, Sydney, Australia. DR. MITSUYO ANDO: Associate Professor, Faculty of Business and Commerce, Keio University, Tokyo, Japan. iv DR. BRENT LAYTON: Chairperson, The Electricity Authority, Wellington, New Zealand. DR. DANILO C. ISRAEL: Senior Research Fellow, Philippine Institute for Development Studies (PIDS), Manila, Philippines. DR. ROEHLANO M. BRIONES: Senior Research Fellow, Philippine Institute for Development Studies (PIDS), Manila, Philippines. MR. ALLEN YU-HUNG LAI: PhD Candidate at the Lee Kuan Yew School of Public Policy (LKYSPP), National University of Singapore (NUS), Singapore. MR. SECK L. TAN: PhD Candidate at the Lee Kuan Yew School of Public Policy (LKYSPP), National University of Singapore (NUS), Singapore. DR. NIPON POAPONGSAKORN: President, Thailand Development Research Institute (TDRI), Bangkok, Thailand. MS. PITSOM MEETHOM: Researcher, Thailand Development Research Institute (TDRI), Bangkok, Thailand. DR. SOMMARAT CHANTARAT: Research Fellow, Arndt-Corden Department of Economics, Crawford School of Public Policy, The Australian National University, Canberra, Australia. DR. KRIRK PANNANGPETCH: Assistant Professor, Faculty of Agriculture, Khon Kaen University, Thailand. DR. NATTAPONG PUTTANAPONG: Lecturer, Faculty of Economics, Thammasat University, Thailand. DR. PREESAN RAKWATIN: Researcher, Research and Development, Geo-Informatics and Space Technology Development Agency (GISTDA), Thailand Ministry of Science and Technology, Thailand. MR. THANASIN TANOMPONGPHANDH: Lecturer, School of Management, Mae Fah Luang University, Thailand. DR. DANIEL P. ALDRICH: Associate Professor, Purdue University, Washington D.C., United State of America. MR. LE DANG TRUNG: Research Fellow, Indochina Research and Consulting (IRC), Hanoi, Vietnam. MR. IKUMO ISONO: Economist, Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia. MR. SATORU KUMAGAI: Research Fellow Sent Abroad (Kuala Lumpur), Economic Integration Studies Group, Inter-disciplinary Studies Center, IDE-JETRO. v ACKNOWLEDGEMENTS This report consists of the papers from ERIA’s research project on “Economic and Welfare Impacts of Disasters in East Asia and Policy Responses” in Fiscal Year 2011- 12. It aims to improve our understanding on how the past and potential impacts of disasters on productions, demands, regional development, and welfare captured by income, poverty and health outcomes, and in depth analysis on economic policy implications at national and regional level. This project also aims at creating policy recommendations for reforms at the national level and explores the prospects for regional cooperation framework. All papers presented in this report were presented in two workshops held in Jakarta and Bangkok in 2011 and 2012. We would like to express our appreciation and gratitude, first and foremost, to the members of our project for their scholarly contribution to the completion of this research. We are deeply indebted to Professor Fukunari Kimura, Chief Economist of ERIA, for his intellectual guidance, encouragement, and supports for the research project. ERIA management support is crucial for the completion of this research. We are profoundly grateful for the strong support provided by our Executive Director, Prof. Hidetoshi Nishimura, and all esteem staffs of ERIA, especially Yunita Nababan and Fadriani Trianingsih for their excellent efforts to ensure the successful delivery of the project. Last, but not least, we would like to thank our colleagues, ERIA researchers, for their enthusiasm and participation in our workshops. Yasuyuki Sawada Sothea Oum vi EXECUTIVE SUMMARY Natural disasters, whether they occur in advanced or developing nations, can destroy people's livelihoods. Extreme natural and man-made events have recently hit both developed and developing countries. We see vividly the devastating and still ongoing 2011 earthquake, tsunami, and nuclear radiation crisis in Japan that has killed tens of thousands of people and resulted in damages of around US$200 to 300 billion. Hundreds of thousands of lives were lost in the Indian Ocean tsunami, Hurricane Katrina, and the earthquakes in central Chile, Haiti, the Sichuan province of China, northern Pakistan, and the Hanshin
Load more

Recommended publications
  • Master Thesis Cross Sectional Study Comparing the Quality of Life
    Master Thesis Cross sectional study comparing the Quality of Life, Academic stress, Ethnic identification and Alcohol use of Norwegian and international students and examining the relationship between these variables By Mohammad Owais Hadi Master of Applied Social Sciences (International Social Welfare and Health Policy) Faculty of Social Sciences Oslo Metropolitan University 1 Acknowledgements Firstly, I acknowledge the blessings, mercy and grace of Allah who has helped me complete my thesis project as Allah has given me the courage and capability to conduct my survey and write this thesis with the best of my efforts. In addition to that, I would like to acknowledge the efforts of all those people who have helped me conduct my research and write this thesis. The most important amongst them was my supervisor Ashley Muller who guided me throughout my study from advising me to compare the quality of life of international and Norwegian students in a very ethical way to doing data analysis and correcting my thesis. Secondly, I thank all those Norwegian and international students who participated in my study by not only filling my questionnaire but also by promoting it to other students and the Norsk studentorganisajon who agreed to promote my survey to the best of their abilities. Thirdly, I thank the Norwegian data protection official Norwegian Centre for Research Data for providing me the ethical clearance to pursue data collection and Norwegian Centre for Addiction Research who provided me the questionnaire to measure the alcohol use of participants of my study. Finally, I am most thankful to my parents, sisters and friends whose wishes, prayers and support helped me complete this thesis project.
    [Show full text]
  • 264 Fogt Sandvik.Pdf
    Nordicom Review 29 (2008) 1, pp. 111-131 “We Represent a Potential, not a Problem” Young People’s Media Use in Diaspora ANNE FOGT & MARGARETH SANDVIK Abstract Media plays a crucial role in democratic and political participation. Media is also impor- tant in construction of identity and for the feeling of belonging. In this article we concen- trate on the media habits of young minority people in Norway. These groups have a cross- cultural competence, a double identity, and an interest in news both from their heritage nation and from Norway. They are frequent users of online newspapers, and they are highly skilled in ICT. Further, their interests in news are combined with a critical aware- ness of how different minority groups are presented. Altogether, these circumstances rep- resent a new situation for media producers and for journalism in general. In a multicultural community, journalists ought to be aware of the diversity of their audience and be will- ing to include minorities in news productions. Most importantly, a balanced presentation of minorities in media is a prerequisite for inclusion. Keywords: media habits, online and printed news, young minority population, diaspora, journalism Introduction Digital media enable those who have left their homeland for different reasons to remain informed, rapidly and effectively, on the news pictures in areas where they have fam- ily and friends. With this in mind it is important to find out whether young people with a minority background are interested in news from other parts of the world, particularly their family’s heritage nation, and whether they discuss this subject with young people with another cultural background.
    [Show full text]
  • Can Sweden Afford Another High Equity Premium?
    Undergraduate Economic Review Volume 6 Issue 1 Article 3 2010 Can Sweden Afford Another High Equity Premium? Matthew K. Miller University of Illinois at Urbana-Champaign, [email protected] Follow this and additional works at: https://digitalcommons.iwu.edu/uer Recommended Citation Miller, Matthew K. (2010) "Can Sweden Afford Another High Equity Premium?," Undergraduate Economic Review: Vol. 6 : Iss. 1 , Article 3. Available at: https://digitalcommons.iwu.edu/uer/vol6/iss1/3 This Article is protected by copyright and/or related rights. It has been brought to you by Digital Commons @ IWU with permission from the rights-holder(s). You are free to use this material in any way that is permitted by the copyright and related rights legislation that applies to your use. For other uses you need to obtain permission from the rights-holder(s) directly, unless additional rights are indicated by a Creative Commons license in the record and/ or on the work itself. This material has been accepted for inclusion by faculty at Illinois Wesleyan University. For more information, please contact [email protected]. ©Copyright is owned by the author of this document. Can Sweden Afford Another High Equity Premium? Abstract This paper calculates the empirical equity premium in Sweden between 1919-2006 and disaster probabilities of 25% and 50% contractions in real Gross Domestic Product. The calculation puts the equity premium at approximately 8%, 2% higher than what appears in the historical United States data, due to rare disaster events outside and idiosyncratic to Sweden. This study makes two important contributions. First, it projects that Sweden can afford the economic cost of another high equity premium but should remain cautious.
    [Show full text]
  • Empirical Asset Pricing with Multi-Period Disaster Risk: a Simulation-Based Approach
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Sönksen, Jantje; Grammig, Joachim Working Paper Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach CFR Working Paper, No. 14-06 Provided in Cooperation with: Centre for Financial Research (CFR), University of Cologne Suggested Citation: Sönksen, Jantje; Grammig, Joachim (2020) : Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach, CFR Working Paper, No. 14-06, University of Cologne, Centre for Financial Research (CFR), Cologne, http://dx.doi.org/10.2139/ssrn.3377345 This Version is available at: http://hdl.handle.net/10419/222986 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu CFR Working Paper NO.
    [Show full text]
  • Rare Disasters and Exchange Rates∗
    RARE DISASTERS AND EXCHANGE RATES∗ Emmanuel Farhi Xavier Gabaix Harvard, CEPR and NBER NYU, CEPR and NBER August 26, 2015 Abstract We propose a new model of exchange rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of world disasters as well as each country’s exposure to these events is time-varying. This creates joint fluctuations in exchange rates, interest rates, options, and stock markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and exchange rates. It also makes empirically successful signature predictions regarding the link between exchange rates and telltale signs of disaster risk in currency options. JEL codes: G12, G15. ∗[email protected], [email protected]. We are indebted to the editor and two referees for detailed and helpful suggestions. Mohsan Bilal, Igor Cesarec, Alex Chinco, Sam Fraiberger, Aaditya Iyer and Cheng Luo provided excellent research assistance. For helpful comments, we thank partici- pants at various seminars and conferences, and Fernando Alvarez, Robert Barro, Nicolas Coeurdacier, Daniel Cohen, Mariano Croce, Alex Edmans, François Gourio, Stéphane Guibaud, Hanno Lustig, Matteo Maggiori, Anna Pavlova, Ken Rogoff, José Scheinkman, John Shea, Hyun Shin, Andreas Stathopoulos, Adrien Verdelhan, Jessica Wachter. We thank the NSF (SES-0820517) for support. 1 I. Introduction We propose a new model of exchange rates, based on the hypothesis of Rietz (1988) and Barro (2006) that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets.
    [Show full text]
  • NORPART Norwegian Partnership Programme for Global Academic Cooperation Start-Up Report 2017
    NORPART Norwegian Partnership Programme for Global Academic Cooperation Start-up report 2017 Table of Contents 1 Introduction ..................................................................................................................................... 3 1.1 Programme development ....................................................................................................... 3 1.2 Aim and objectives .................................................................................................................. 4 2 The first application round – experiences and outcomes ............................................................... 5 3 The project portfolio ....................................................................................................................... 6 4 Expected results .............................................................................................................................. 8 4.1 Strengthened partnership and synergies with other funding schemes .................................. 8 4.2 Increased quality and internationalisation of academic programmes ................................... 8 4.3 Student mobility ...................................................................................................................... 9 5 Annex 1: Description of projects ................................................................................................... 14 Published by the Norwegian Centre for International Cooperation in Education (SIU) November 2017 2 1 Introduction
    [Show full text]
  • Recovery from Economic Disasters Bruno Ćorić Blanka Perić Škrabić
    Working Paper Series 676 (ISSN 1211-3298) Recovery from Economic Disasters Bruno Ćorić Blanka Perić Škrabić CERGE-EI Prague, November 2020 ISBN 978-80-7343-483-0 (Univerzita Karlova, Centrum pro ekonomický výzkum a doktorské studium) ISBN 978-80-7344-565-2 (Národohospodářský ústav AV ČR, v. v. i.) Recovery from Economic Disasters Ćorić Brunoa,b,* aUniversity of Split, Faculty of Economics, Cvite Fiskovića 5, 21000 Split, Croatia bCERGE-EI Foundation Teaching Fellow, 110 Jabez Street #1004, Newark, NJ 07105 USA (email: [email protected]) Škrabić Perić Blankac cUniversity of Split, Faculty of Economics, Cvite Fiskovića 5, 21000 Split, Croatia (email: [email protected]) November 2020 Abstract This study uses two large datasets to explore the output dynamics following economic disasters, one including 180 economic disasters across 38 countries over the last two centuries, and the other including 204 economic disasters in 182 countries since World War II. Our results suggest that extreme economic crises are associated with huge and remarkably persistent output loss. On average, output loss surges to above 26 percent in the first few years after the outbreak of an economic disaster and remains above 20 percent for as long as 20 years. It is only after more than 50 years that the loss is fully recovered. Key words: economic disaster, output loss, economic recovery. JEL: E32; N10. Number of Words: 6,658 *Corresponding author: Bruno Ćorić, University of Split, Faculty of Economics, Cvite Fiskovića 5, 21000 Split, Croatia, e-mail: [email protected], telephone: ++385914430724 1 1. Introduction Economic disasters are rare but extremely large economic crises, defined in Barro and Ursúa (2008) as a cumulative decline in output and/or consumption over one or more years of at least 10 percent.
    [Show full text]
  • The Total Risk Premium Puzzle
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES The Total Risk Premium Puzzle Òscar Jordà Federal Reserve Bank of San Francisco University of California, Davis Moritz Schularick University of Bonn CEPR Alan M. Taylor University of California, Davis NBER CEPR March 2019 Working Paper 2019-10 https://www.frbsf.org/economic-research/publications/working-papers/2019/10/ Suggested citation: Jordà, Òscar, Moritz Schularick, Alan M. Taylor. 2019. “The Total Risk Premium Puzzle,” Federal Reserve Bank of San Francisco Working Paper 2019-10. https://doi.org/10.24148/wp2019-10 The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. The Total Risk Premium Puzzle ? Oscar` Jorda` † Moritz Schularick ‡ Alan M. Taylor § March 2019 Abstract The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more.
    [Show full text]
  • Child and Adolescent Psychiatry and Mental Health Biomed Central
    Child and Adolescent Psychiatry and Mental Health BioMed Central Research Open Access Better mental health in children of Vietnamese refugees compared with their Norwegian peers - a matter of cultural difference? Aina Basilier Vaage*1,2, Laila Tingvold3, Edvard Hauff3,4, Thong Van Ta5, Tore Wentzel-Larsen6, Jocelyne Clench-Aas7 and Per Hove Thomsen1,8 Address: 1Centre for Child and Adolescent Mental Health, University of Bergen, Bergen, Norway, 2Department of Child and Adolescent Psychiatry, Stavanger University Hospital, Stavanger, Norway, 3Institute of Psychiatry, University of Oslo, Oslo, Norway, 4Oslo University Hospital, Ullevål Department of Psychiatry, Oslo, Norway, 5International House Foundation, Stavanger, Norway, 6Centre for Clinical Research, Haukeland University Hospital, Bergen, Norway, 7Norwegian Institute of Public Health, Division of Mental Health, Oslo, Norway and 8Centre for Child and Adolescent Psychiatry, University of Aarhus, Aarhus, Denmark Email: Aina Basilier Vaage* - [email protected]; Laila Tingvold - [email protected]; Edvard Hauff - [email protected]; Thong Van Ta - [email protected]; Tore Wentzel-Larsen - tore.wentzel-larsen@helse- bergen.no; Jocelyne Clench-Aas - [email protected]; Per Hove Thomsen - [email protected] * Corresponding author Published: 21 October 2009 Received: 5 March 2009 Accepted: 21 October 2009 Child and Adolescent Psychiatry and Mental Health 2009, 3:34 doi:10.1186/1753-2000-3-34 This article is available from: http://www.capmh.com/content/3/1/34 © 2009 Vaage et al; licensee BioMed Central Ltd. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
    [Show full text]
  • Rare Disaster Risk and the Equity Premium Puzzle
    Rare Disaster Risk and the Equity Premium Puzzle Henk Berkmana, Ben Jacobsen b, John Lee a a University of Auckland, Auckland, New Zealand b Massey University, Auckland, New Zealand Abstract The probability of rare disasters helps to explain the longstanding equity premium puzzle. Global political instability, our proxy for rare disaster risk, is a significant determinant of the expected market risk premium based on analyst target prices. Consistent with long- run risk models, uncertainty about expected GDP growth and expected consumption growth are also significantly positively related to the expected market risk premium. We obtain similar results when we use the earning-price ratio and the dividend-price ratio as proxies for the expected market risk premium. JEL Classifications: G12; G15 Keywords: Equity Premium; Rare Disasters; Consumption Risk; International Political Crises; Market Risk Premium Corresponding author: [email protected] (H. Berkman) 1. Introduction This study provides novel evidence supporting the claim that the probability of rare disasters explains the longstanding equity premium puzzle raised in Mehra and Prescott (1985). 1 Figure 1 illustrates the main point of our paper. We plot the expected market risk premium based on estimates from analyst target prices against the expected level of global political instability based on the crisis severity index developed in Berkman, Jacobsen and Lee (2011). [Figure 1 here] The correlation between the two annual series in Figure 1 is 0.51 (p-value is 0.006; at a monthly frequency the correlation is 0.34 with a p-value of 0.0001). This highly significant correlation confirms the main prediction in time-varying disaster risk models: expected returns on stocks relative to bonds are high when the probability of disasters is high (see, e.g., Gabaix 2009, Wachter 2009, and Gourio, 2008).
    [Show full text]
  • Variable Rare Disasters: an Exactly Solved Framework for Ten Puzzles in Macro-Finance∗
    VARIABLE RARE DISASTERS: AN EXACTLY SOLVED FRAMEWORK FOR TEN PUZZLES IN MACRO-FINANCE∗ XAVIER GABAIX This article incorporates a time-varying severity of disasters into the hy- pothesis proposed by Rietz (1988) and Barro (2006) that risk premia result from the possibility of rare large disasters. During a disaster an asset’s fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and, thus, volatile asset prices and return predictability. Using Downloaded from the recent technique of linearity-generating processes, the model is tractable and all prices are exactly solved in closed form. In this article’s framework, the following empirical regularities can be understood quantitatively: (i) equity premium puzzle; (ii) risk-free rate puzzle; (iii) excess volatility puzzle; (iv) predictability of aggregate stock market returns with price-dividend ratios; (v) often greater explanatory power of characteristics than covariances for asset http://qje.oxfordjournals.org/ returns; (vi) upward-sloping nominal yield curve; (vii) predictability of future bond excess returns and long-term rates via the slope of the yield curve; (viii) corporate bond spread puzzle; (ix) high price of deep out-of-the-money puts; and (x) high put prices being followed by high stock returns. The calibration passes a variance bound test, as normal-times market volatility is consistent with the wide dispersion of disaster outcomes in the historical record. The model extends to a setting with many factors and to Epstein-Zin preferences. JEL Codes: E43, E44, G12. at New York University School of Law on May 1, 2012 I.INTRODUCTION There has been a revival of a hypothesis proposed by Rietz (1988) that the possibility of rare disasters, such as economic depressions or wars, is a major determinant of asset risk premia.
    [Show full text]
  • Rare Macroeconomic Disasters
    Rare Macroeconomic Disasters Robert J. Barro1 and José F. Ursúa2 1 Department of Economics, Harvard University, Cambridge, Massachusetts 02138; email: [email protected] 2 Department of Economics, Harvard University, Cambridge, Massachusetts 02138; email: [email protected] August 2011 Key words: national accounts, rare disasters, disaster probability, fat tails, power-law distribution, equity premium, asset-pricing puzzles. Abstract The potential for rare macroeconomic disasters may explain an array of asset-pricing puzzles. Our empirical studies of these extreme events rely on long-term data now covering 28 countries for consumption and 40 for GDP. A baseline model calibrated with observed peak-to-trough disaster sizes accords with the average equity premium with a reasonable coefficient of relative risk aversion. High stock-price volatility can be explained by incorporating time-varying long- run growth rates and disaster probabilities. Business-cycle models with shocks to disaster probability have implications for the cyclical behavior of asset returns and corporate leverage, and international versions may explain the uncovered-interest-parity puzzle. Richer models of disaster dynamics allow for transitions between normalcy and disaster, bring in post-crisis recoveries, and use the full time series on consumption. Potential future research includes applications to long-term economic growth and environmental economics and the use of stock- price options and other variables to gauge time-varying disaster probabilities. i Contents 1. INTRODUCTION 2. MEASURING EXTREME MACRO-FINANCIAL EVENTS 2.1 Recent Improvements in Data on National-Accounts Variables and Asset Returns 2.2 Statistical Properties of Macroeconomic Growth Rates and Asset Returns 2.3 Macroeconomic Disaster Events 3.
    [Show full text]