Challenging the rare disaster model: An empirical analysis using the survey of professional forecasters

This study assesses the extent to which rare-disaster models explain the equity premium when calibrated with downside tail probabilities from the Survey of Professional Forecasters (SPF). Each quarter, this probability is incorporated into canonical Barro-type models as the representative agent’s subjective belief about disaster risk, allowing these beliefs to vary over time. While this calibration generates elevated equity premia during crisis episodes, it fails to account for the magnitude of the observed equity premium in normal periods, implying an average equity premium of approximately 3.3%, roughly half the historical U.S. average. These findings suggest that standard rare-disaster models omit important mechanisms or risk channels relevant for asset pricing, casting doubt on the sufficiency of disaster risk as a standalone explanation for the equity premium puzzle. • Constructs a time-varying SPF-based measure of downside tail risk in GDP growth. • Maps SPF tail probabilities into rare-disaster models as subjective disaster risk. • Provides a conservative upper-bound test of rare-disaster asset pricing models. • Shows models fail to account for the equity premium under SPF-based calibration. • Finds similar results across Barro (2006), Gourio (2008), and Gabaix (2012).