Just a thought...
Robert Barro should have called his 2005 "Rare Events and the Equity Premium" paper something like "Rare Events and the Low Riskfree Rate" instead...
http://papers.nber.org/papers/w11310.pdf
The paper uses the possibility of future disastrous falls in economy-wide consumption and in payouts on equities to explain the high equity premium. The primary channel is not that fear of future catastrophe depresses the price and hence raise the in-sample average return to equities (for we don't observe many such disastrous falls in our sample). The primary channel is that fear of future catastrophe raises desired savings to carry purchasing power forward in time in case of need. But since assets are in fixed supply in the Lucas-tree model Barro uses, this outward shift in savings demand drives the prices of real bonds up and the returns on real bonds down. It also--for CRRA greater than one--drives the prices up and the returns down on equities as well. A greater fear of future catastrophe is a source of high, not low, price-dividend and price-earnings ratios.
Hence the story implicit in Barro (2005): the implicit story is that stock market multiples were much higher in 2000 than they were in 1982 because the likelihood of a macroeconomic catastrophe greater than the Great Depression was much higher in 2000 than it was in 1982. Hence people were desperate to save for the future to insure against the greater likelihood of macroeconomic catastrophe. And that was the force underpinning the 1990s stock market boom.
This is, I think, a trap set for us by using the Lucas-tree model as a workhorse. Its lack of production and accumulation is, I think, a much bigger drawback than is sometimes recognized...
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