Rare disasters are economic events that are infrequent and large in magnitude, having a negative effect on an economy. Rare disasters are important because they provide an explanation of the equity premium puzzle, the behavior of interest rates, and other economic phenomena.
The parameters for a rare disaster are a substantial drop in GDP and at least a 10% decrease in consumption. Examples include financial disasters: The Great Depression and the Asian Financial Crisis; wars: World War I, World War II and regional conflicts; epidemics: Influenza outbreaks and the Asian Flu; and weather events: Tsunamis and Earthquakes; however, any event that has a substantial impact on GDP and consumption could be considered a rare disaster.
The idea was first proposed by Rietz in 1988, as a way to explain the equity premium puzzle. Since then, other economists have added to and strengthened the idea with evidence, but many economists are still skeptical of the theory.
Read more about Rare Disasters: Contents, Model, Applications, History, Controversy
Famous quotes containing the words rare and/or disasters:
“No matter what our achievements might be, we think well of ourselves only in rare moments. We need people to bear witness against our inner judge, who keeps book on our shortcomings and transgressions. We need people to convince us that we are not as bad as we think we are.”
—Eric Hoffer (1902–1983)
“The formula for achieving a successful relationship is simple: you should treat all disasters as if they were trivialities but never treat a triviality as if it were a disaster.”
—Quentin Crisp (b. 1908)