Mehra-Prescott with Rare Disasters (Equity Premium Puzzle)
Published:
Extends the classic Mehra-Prescott (1985) consumption-based asset pricing model with a rare disasters framework — motivated by Rietz (1988) and Barro (2006) — to better explain the historical equity premium without requiring implausible levels of risk aversion.
Key work: Mathematical formulation of the rare disasters extension to the Lucas tree model · Calibration to U.S. consumption and return data · Sensitivity analysis on disaster probability and magnitude parameters · Comparison of implied risk aversion against empirical estimates · Jupyter notebook with full derivations and reproducible results
Stack: Python, Jupyter, econometrics, stochastic processes, asset pricing theory