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An exploration of the effect of doubt during disasters on equity premiums

Author:
Suzuki, Shiba
Source:
Economics letters 2014 v.123 no.3 pp. 270-273
ISSN:
0165-1765
Subject:
disasters, models, utility functions
Abstract:
In this note, we consider the effect on equity premiums of a representative household’s subjective expectations during disasters. In particular, we focus on the effect of doubt during disasters. We derive analytical solutions of equity premiums in the model of power utility function and conduct numerical exercises of the model of the recursive utility function. Our contribution is to demonstrate that doubt during disasters–even mild ones–generates high equity premiums.
Agid:
5998149