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An Equilibrium Asset Pricing Model with Labor Market Search

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  • 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).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17742.

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Date of creation: Jan 2012
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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 04:21:35
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Cited by:
  1. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Unemployment Crises," NBER Working Papers 19207, National Bureau of Economic Research, Inc.
  2. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Solving the DMP Model Accurately," NBER Working Papers 19208, National Bureau of Economic Research, Inc.
  3. Jack Favilukis & Xiaoji Lin, 2012. "Wage Rigidity: A Solution to Several Asset Pricing Puzzles," 2012 Meeting Papers 589, Society for Economic Dynamics.
  4. Robert E. Hall, 2014. "High Discounts and High Unemployment," NBER Working Papers 19871, National Bureau of Economic Research, Inc.
  5. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.

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