Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility

63 Pages Posted: 21 Sep 2015 Last revised: 1 Oct 2015

See all articles by Mete Kilic

Mete Kilic

University of Southern California - Marshall School of Business

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: September 2015

Abstract

What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability implies greater risk and lower future growth, lowering the incentives of firms to invest in hiring. During periods of high risk, stock market valuations are low and unemployment rises. The model thus explains volatility in equity and labor markets, and the relation between the two.

Suggested Citation

Kilic, Mete and Wachter, Jessica A., Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility (September 2015). NBER Working Paper No. w21575, Available at SSRN: https://ssrn.com/abstract=2663233

Mete Kilic (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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