Durable goods, rare disasters, and the value premium

Standard asset pricing models struggle to rationalize the value premium anomaly empirical fact through risk arguments since value stocks do not generally carry more risks than growth stocks. We revisit this question by estimating a rare disaster event Consumption-Capital-Asset Pricing model (C-CAPM) that incorporates high-impact mini-disaster events, thereby capturing the dynamic nature of risk premia. Utilizing a post-COVID-19 U.S. consumption dataset, we estimate the model using four different consumption measures: non-durables and services, services alone, non-durables alone, and durables. The model only partially explains the value premium anomaly in post-COVID-19 subsamples when using non-durables and services, services, and non-durables. However, when durables expenditures are incorporated, the model successfully accounts for the value premium anomaly in all pre- and post-COVID-19 periods. Our main contribution is thus the rehabilitation of the rare disaster consumption-based model as an asset pricing model by suggesting that durables rare disasters can explain the value anomaly observed in the U.S. equity market.