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We define a disastrous default as the default of a systemic entity, which has a negative effect
on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage assetpricing
framework, we exploit prices of disaster-exposed assets (credit and equity derivatives)
to extract information on the expected (i) influence of a disastrous default on consumption and
(ii) probability of a financial meltdown. We find that the returns of disaster-exposed assets
are consistent with a systemic default being followed by a 3% decrease in consumption. The
recessionary influence of disastrous defaults implies that financial instruments whose payoffs
are exposed to such credit events carry substantial risk premiums. We also produce systemic
risk indicators based on the probability of observing a certain number of systemic defaults or
a sharp drop of consumption.
