An Equilibrium Asset Pricing Model with Labor Market Search

47 Pages Posted: 14 Jan 2012

See all articles by Lars-Alexander Kuehn

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2012

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).

Suggested Citation

Kuehn, Lars-Alexander and Petrosky-Nadeau, Nicolas and Zhang, Lu, An Equilibrium Asset Pricing Model with Labor Market Search (January 2012). NBER Working Paper No. w17742, Available at SSRN: https://ssrn.com/abstract=1985075

Lars-Alexander Kuehn (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Pittsburgh, PA 15213-3890
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Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

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Lu Zhang

Ohio State University - Fisher College of Business ( email )

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National Bureau of Economic Research (NBER)

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