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An Equilibrium Asset Pricing Model with Labor Market Search

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  • Kuehn, Lars-Alexander

    (Carnegie Mellon University)

  • Petrosky-Nadeau, Nicolas

    (Carnegie Mellon University)

  • Zhang, Lu

    (OH State University)

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).

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2012-01.

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Date of creation: Dec 2011
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Handle: RePEc:ecl:ohidic:2012-01

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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. 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.
  2. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Solving the DMP Model Accurately," NBER Working Papers 19208, National Bureau of Economic Research, Inc.
  3. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.
  4. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
  5. Nicolas Petrosky-Nadeau & Lu Zhang, . "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
  6. Robert E. Hall, 2014. "High Discounts and High Unemployment," NBER Working Papers 19871, National Bureau of Economic Research, Inc.

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