Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility

No 21575, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability implies greater risk and lower future growth, lowering the incentives of firms to invest in hiring. During periods of high risk, stock market valuations are low and unemployment rises. The model thus explains volatility in equity and labor markets, and the relation between the two.

JEL-codes: E24 E32 G12 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-mac
Note: AP EFG
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Citations: View citations in EconPapers (7)

Published as Mete Kilic & Jessica A Wachter, 2018. "Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility," The Review of Financial Studies, vol 31(12), pages 4762-4814.

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