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An Equilibrium Asset Pricing Model with Labor Market Search

Author

Listed:
  • Lars-Alexander Kuehn
  • Nicolas Petrosky-Nadeau
  • Lu Zhang
Abstract
Search frictions in the labor market help explain the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces a sizeable equity premium of 4.54% per annum with a low interest rate volatility of 1.34%. The equity premium is strongly countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, search frictions, combined with a small labor surplus and large job destruction flows, give rise endogenously to rare disaster risks a la Rietz (1988) and Barro (2006).

Suggested Citation

  • Lars-Alexander Kuehn & Nicolas Petrosky-Nadeau & Lu Zhang, 2012. "An Equilibrium Asset Pricing Model with Labor Market Search," NBER Working Papers 17742, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17742
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    1. An Equilibrium Asset Pricing Model with Labor Market Search
      by Christian Zimmermann in NEP-DGE blog on 2012-01-27 10:21:35

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    Cited by:

    1. Nicolas Petrosky-Nadeau & Lu Zhang, "undated". "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
    2. Fernando M. Duarte & Carlo Rosa, 2015. "The equity risk premium: a review of models," Economic Policy Review, Federal Reserve Bank of New York, issue 2, pages 39-57.
    3. Andrew Phiri, 2017. "The Unemployment-Stock Market Relationship in South Africa: Evidence from Symmetric and Asymmetric Cointegration Models," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 15(3 (Fall)), pages 231-254.
    4. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    5. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    6. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    7. Pan, Wei-Fong, 2018. "Does the stock market really cause unemployment? A cross-country analysis," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 34-43.
    8. Thien Nguyen & Lukas Schmid & Howard Kung & Mariano Croce, 2012. "Fiscal Policies and Asset Prices," 2012 Meeting Papers 565, Society for Economic Dynamics.
    9. Xiaoji Lin & Ding Luo & Andres Donangelo & Frederico Belo, 2017. "Labor Hiring, Aggregate Dividends, and Return Predictability in the Time Series," 2017 Meeting Papers 885, Society for Economic Dynamics.
    10. Robert E. Hall, 2017. "High Discounts and High Unemployment," American Economic Review, American Economic Association, vol. 107(2), pages 305-330, February.
    11. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.
    12. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
    13. Andrew Y. Chen, 2014. "Precautionary Volatility and Asset Prices," Finance and Economics Discussion Series 2014-59, Board of Governors of the Federal Reserve System (U.S.).
    14. Jack Favilukis & Xiaoji Lin, 2012. "Wage Rigidity: A Solution to Several Asset Pricing Puzzles," 2012 Meeting Papers 589, Society for Economic Dynamics.
    15. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Solving the DMP Model Accurately," NBER Working Papers 19208, National Bureau of Economic Research, Inc.
    16. Roberto Marfè, 2016. "Labor Rigidity, In ation Risk and Bond Returns," Carlo Alberto Notebooks 461, Collegio Carlo Alberto.
    17. Roi D. Taussig, 2017. "Stickiness of employee expenses and implications for stock returns," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 297-309, August.
    18. Mikhail Simutin & JessieJiaxu Wang & Lars Kuehn, 2014. "A Labor Capital Asset Pricing Model," 2014 Meeting Papers 695, Society for Economic Dynamics.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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