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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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  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. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Solving the DMP Model Accurately," NBER Working Papers 19208, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 2014. "High Discounts and High Unemployment," NBER Working Papers 19871, National Bureau of Economic Research, Inc.
  3. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.
  4. Nicolas Petrosky-Nadeau & Lu Zhang, . "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
  5. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
  6. Favilukis, Jack & Lin, Xiaoji, 2012. "Wage Rigidity: A Solution to Several Asset Pricing Puzzles," Working Paper Series 2012-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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