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An Equilibrium Asset Pricing Model with Labor Market Search

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  • Kuehn Lars-Alexander
  • Petrosky-Nadeau Nicolas
  • Zhang Lu

Abstract

Asset pricing models have largely overlooked the role of labor income dynamics despite it representing two thirds of disposal income. In this paper, we solve a general equilibrium model which can both rationalize important feature of labor markets as well as financial markets. To this end, we embed labor market search frictions into a business cycle model where the representative household has recursive Epstein-Zin preferences. We find that the model is consistent with the cyclical behavior of the unemployment and labor market tightness. Crucially, for asset prices, aggregate employment and output react progressively to innovations and the model delivers a high degree of persistence in the growth rate of aggregate output and consumption. This endogenous persistence in combination with recursive Epstein-Zin preferences increase the equity risk premium considerably.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2010-E63.

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Handle: RePEc:cmu:gsiawp:1780526870

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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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 04:21:35
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Cited by:
  1. Jack Favilukis & Xiaoji Lin, 2012. "Wage Rigidity: A Solution to Several Asset Pricing Puzzles," 2012 Meeting Papers 589, Society for Economic Dynamics.
  2. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.

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