Macroeconomic disasters and the equity premium puzzle: Are emerging countries riskier?

Not necessarily. I provide evidence that advanced countries' equity premium and consumption growth differ significantly from those of emerging countries. I then estimate distinct disaster risk parameters for these two country groups. My Bayesian analysis demonstrates that in some aspects advanced countries are more exposed to disaster risk, while in others their exposure is smaller. Disasters are estimated to be more severe and uncertain in advanced countries, but are on average less persistent. Advanced countries are also more likely to experience a global disaster, whereas disasters in emerging countries tend to be more idiosyncratic. I show that country-group heterogeneity in disaster length and magnitude has the largest impact on equity premium. (C) 2020 Elsevier B.V. All rights reserved.