Financial Markets in the Face of the Apocalypse
This paper brings together two strands of the literature: Quantifying the impact of apocalyptic risk on capital markets, and the correct computation of the equity risk premium. For the former, we use events in four countries during the Second World War to discern markets' incorporation of information regarding the probability of an Armageddon for each country. We then turn to analyzing the impact of a political col- lapse on the correct computation of the equity risk premium. Arguing that past computations did not properly account for the nancial implications of political collapse on prop- erty/civil/human rights, we argue past calculations overstated the equity risk premium. We provide a correct estimate of the equity risk premium, demonstrating the important changes in this estimate over time.