The article by Robert J. Barro explores the role of rare economic disasters in explaining various asset-pricing puzzles, such as the high equity premium, low risk-free rate, and volatile stock returns. Barro calibrates a model that incorporates the probability and impact of economic disasters, such as World War I, the Great Depression, and World War II, to understand these puzzles. The model, an extension of previous work by Rietz, assumes a representative agent with time-additive and isoelastic preferences in a Lucas-tree type economy. The analysis suggests that the probability of economic disasters is around 1.5-2% per year, with per capita GDP declines ranging from 15% to 64%. The model's predictions align well with observed asset returns, including the low real rates of return on government bills during major wars. The article also discusses the impact of leverage and partial default on asset prices and concludes that rare disasters can significantly influence equity premiums and other asset market behaviors.The article by Robert J. Barro explores the role of rare economic disasters in explaining various asset-pricing puzzles, such as the high equity premium, low risk-free rate, and volatile stock returns. Barro calibrates a model that incorporates the probability and impact of economic disasters, such as World War I, the Great Depression, and World War II, to understand these puzzles. The model, an extension of previous work by Rietz, assumes a representative agent with time-additive and isoelastic preferences in a Lucas-tree type economy. The analysis suggests that the probability of economic disasters is around 1.5-2% per year, with per capita GDP declines ranging from 15% to 64%. The model's predictions align well with observed asset returns, including the low real rates of return on government bills during major wars. The article also discusses the impact of leverage and partial default on asset prices and concludes that rare disasters can significantly influence equity premiums and other asset market behaviors.