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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.

Suggested Citation

  • Kuehn Lars-Alexander & Petrosky-Nadeau Nicolas & Zhang Lu, "undated". "An Equilibrium Asset Pricing Model with Labor Market Search," GSIA Working Papers 2010-E63, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1780526870
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. An Equilibrium Asset Pricing Model with Labor Market Search
      by Christian Zimmermann in NEP-DGE blog on 2012-01-27 10:21:35

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    2. Fernando M. Duarte & Carlo Rosa, 2015. "The equity risk premium: a review of models," Economic Policy Review, Federal Reserve Bank of New York, issue 2, pages 39-57.
    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. Andrew Y. Chen, 2014. "Precautionary Volatility and Asset Prices," Finance and Economics Discussion Series 2014-59, Board of Governors of the Federal Reserve System (U.S.).
    6. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Solving the DMP Model Accurately," NBER Working Papers 19208, National Bureau of Economic Research, Inc.
    7. Andrew Phiri, 2017. "The Unemployment-Stock Market Relationship in South Africa: Evidence from Symmetric and Asymmetric Cointegration Models," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 15(3 (Fall)), pages 231-254.
    8. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    9. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    10. Roberto Marfè, 2016. "Labor Rigidity, In ation Risk and Bond Returns," Carlo Alberto Notebooks 461, Collegio Carlo Alberto.
    11. Roi D. Taussig, 2017. "Stickiness of employee expenses and implications for stock returns," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 297-309, August.
    12. Nicolas Petrosky-Nadeau & Lu Zhang, "undated". "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
    13. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    14. Pan, Wei-Fong, 2018. "Does the stock market really cause unemployment? A cross-country analysis," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 34-43.
    15. Thien Nguyen & Lukas Schmid & Howard Kung & Mariano Croce, 2012. "Fiscal Policies and Asset Prices," 2012 Meeting Papers 565, Society for Economic Dynamics.
    16. Xiaoji Lin & Ding Luo & Andres Donangelo & Frederico Belo, 2017. "Labor Hiring, Aggregate Dividends, and Return Predictability in the Time Series," 2017 Meeting Papers 885, Society for Economic Dynamics.
    17. Mikhail Simutin & JessieJiaxu Wang & Lars Kuehn, 2014. "A Labor Capital Asset Pricing Model," 2014 Meeting Papers 695, Society for Economic Dynamics.
    18. 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.
    19. Robert E. Hall, 2017. "High Discounts and High Unemployment," American Economic Review, American Economic Association, vol. 107(2), pages 305-330, February.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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