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Risks after Disasters:
A Note on the Effects of
Precautionary Saving on Equity Premiums
March 2009
Abstract
This paper studies the effects on equity premiums of “risks after disasters”, which are defined as a sharp rise in volatility of real per capita GDP growth rates immediately following disasters. This paper makes three contributions. First, we analytically demonstrate that if and only if the degree of relative prudence is higher than 2, risks after disasters decrease equity premiums. Second, we find that the differences between equity premiums with and without risks after disasters are quantitatively significant. Third, equity premiums are still higher in the case of disaster than without a disaster.
