The article explores how rare economic disasters explain asset pricing puzzles, such as the equity premium and low risk-free rates. Robert J. Barro calibrates disaster probabilities from 20th-century global history, focusing on events like World War I, the Great Depression, and World War II. These disasters, with probabilities around 1.5–2% per year and GDP contractions of 15–64%, help explain asset market anomalies. Barro extends Rietz's model, incorporating time-additive, isoelastic preferences and complete markets. The model shows that rare disasters can explain the equity premium and low real interest rates during wars. The analysis includes a Lucas-tree model with rare disasters, where equity returns depend on disaster probabilities and sizes. Calibration using historical data shows that disaster probabilities and sizes align with observed economic contractions. The model also accounts for partial defaults on government bills during disasters, affecting real returns. Calibration results show that disaster probabilities and risk aversion parameters can explain empirical equity premiums and bill rates. The model's predictions align with historical data on stock and bill returns during economic crises, including the Great Depression and World Wars. The results suggest that rare disasters significantly influence asset prices and returns, providing a plausible explanation for asset pricing puzzles. The model also considers leverage effects, showing that equity premiums can be higher when equity payments are procyclical. Overall, the study highlights the importance of rare disasters in explaining asset market behavior and pricing anomalies.The article explores how rare economic disasters explain asset pricing puzzles, such as the equity premium and low risk-free rates. Robert J. Barro calibrates disaster probabilities from 20th-century global history, focusing on events like World War I, the Great Depression, and World War II. These disasters, with probabilities around 1.5–2% per year and GDP contractions of 15–64%, help explain asset market anomalies. Barro extends Rietz's model, incorporating time-additive, isoelastic preferences and complete markets. The model shows that rare disasters can explain the equity premium and low real interest rates during wars. The analysis includes a Lucas-tree model with rare disasters, where equity returns depend on disaster probabilities and sizes. Calibration using historical data shows that disaster probabilities and sizes align with observed economic contractions. The model also accounts for partial defaults on government bills during disasters, affecting real returns. Calibration results show that disaster probabilities and risk aversion parameters can explain empirical equity premiums and bill rates. The model's predictions align with historical data on stock and bill returns during economic crises, including the Great Depression and World Wars. The results suggest that rare disasters significantly influence asset prices and returns, providing a plausible explanation for asset pricing puzzles. The model also considers leverage effects, showing that equity premiums can be higher when equity payments are procyclical. Overall, the study highlights the importance of rare disasters in explaining asset market behavior and pricing anomalies.