ECB paper models economic impact of 'disaster risk'


A working paper, published by the European Central Bank (ECB) on August 21, develops a model to test the impact of investors incorporating "disaster risk" – the expected probability of severe recession – into equity prices, finding this affects the wider economy.

The author, François Gourio, combines a real business cycle model with an exogenously time-varying measure of disaster risk based on the price-dividend ratio. "An increase in disaster risk leads to a decline of output, investment, stock

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