On the afternoon of the 24th May, 2017, the Fifteenth Annual Yan Fu Economics Memorial Lecture at Peking University’s National School of Development was successfully held. The Yan Fu Economics Memorial Lecture began in 2001, its aim was to commemorate Mr Yan Fu’s contribution to the field and continue his wish to promote China’s development in modern Economics. Each year, the National School of Development invites a globally recognized economist to speak at the event.
This year’s guest speaker was Professor Robert Barro, Professor of Economics at Harvard Univeristy. Prof. Barro has made important contributions to the fields of macroeconomics, economic growth, monetary theory and policy. NSD Dean Yao Yang opened the event on behalf of the school.
Prof. Barro’s speech was on ‘Safe Assets’. He explained the ‘risk premium paradox’ from a tail risk perspective, stating that in the presence of catastrophic events, people will tend towards safe assets and, because of this, the rate on safe assets will lower and risk premia will increase.
In the classic Lucas-tree model, an increase in aggregate risk comes from the random impact of production technology – safe assets cannot influence and circumvent aggregate risk. Therefore, in such a model, the quantity of safe assets will be nil. This means that traditional models cannot be used to analyse safe assets and risk-free rates.
Professor Barro introduced households with heterogeneous risk preferences and low-probability disasters to the Lucas-tree model and, through a general equilibrium framework analysis, solved for the number of safe assets and interest rates, producing the risk premia on risky assets. The baseline case produced a risk-free rate of 1% and unlevered equity premium of 4.2% with safe assets taking 15% of total assets. In this model, when the disaster shock probability ‘p’ rises from 0 to 0.01, the risk-free rate drops from 0.093 to 0.026, whilst the return on risky assets also lowers. The drop in risk-free return is greater than the drop in risky-asset return, so the difference between the two increases, thus solving the mystery of the asset premium puzzle.
Following the lecture, Prof. Barro answered questions posed by teachers and students. Dean Yao Yang presented a commemorative gift to Prof. Barro on behalf of the NSD and the lecture was concluded amidst applause.