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Labor Unions and Asset Prices

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Author Info

  • Francesco Busato
  • William Addessi

    ()
    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

The paper investigates the nexus between labor and financial markets, focusing on the interaction between labor union behavior in setting wages, firms' investment strategy and asset prices. The way unions set wage claims after observing firm's financial performance increases the volatility of firms' returns and the riskiness of corporate ownership. To remunerate this higher volatility and stronger risk, firms' equities have to grant high return. This mechanism is able to offer an explanation of for the "equity puzzle", that is it can explain the difference between equity returns and the risk free rate. It is a welcome result that the simulated excess return is about the empirical estimate and this result is obtained with a logarithmic specification of the shareholders preferences.

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File URL: ftp://ftp.econ.au.dk/afn/wp/07/wp07_05.pdf
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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2007-05.

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Length: 25
Date of creation: 11 May 2007
Date of revision:
Handle: RePEc:aah:aarhec:2007-05

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Equity Premium; General Equilibrium; Union Models;

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References

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  1. Danthine, Jean-Pierre & Kurmann, Andre, 2005. "The Macroeconomic Consequences of Reciprocity in Labour Relations," CEPR Discussion Papers 5174, C.E.P.R. Discussion Papers.
  2. Danthine, Jean-Pierre & Donaldson, John B, 2002. "Decentralizing the Stochastic Growth Model," CEPR Discussion Papers 3348, C.E.P.R. Discussion Papers.
  3. Chiarini, Bruno & Piselli, Paolo, 2005. "Business cycle, unemployment benefits and productivity shocks," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 670-690, December.
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