Time-varying Risk Premium and Unemployment Risk Across Age Groups

Review of Financial Studies, Forthcoming

73 Pages Posted: 6 Mar 2018 Last revised: 21 Oct 2019

See all articles by Indrajit Mitra

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Yu Xu

University of Delaware

Date Written: July 15, 2019

Abstract

We show that time-varying risk premium in financial markets can explain a key yet puzzling feature of labor markets: the large differences in unemployment risk across worker age-groups over the business cycle. Our search model features a time-varying risk premium and learning about unobserved heterogeneity in worker productivity. Their interaction generates large real effects through firms' labor policies. Our model predicts higher unemployment risk of younger workers relative to prime-age workers when risk premium is high, and the employment ratio of prime-age to young workers to be more cyclical in high beta industries. We find empirical support for these predictions.

Keywords: Time-varying risk premium, labor search, unemployment risk across age groups, labor market cleansing

JEL Classification: D83, E24, E32, E44, J11, J63, J64

Suggested Citation

Mitra, Indrajit and Xu, Yu, Time-varying Risk Premium and Unemployment Risk Across Age Groups (July 15, 2019). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3131042 or http://dx.doi.org/10.2139/ssrn.3131042

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Yu Xu (Contact Author)

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://www.yuxufinance.net/

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