Search Intensity and Asset Prices

Abstract

The job search decisions of unemployed workers are forward-looking and shaped by the returns they anticipate from the search process. When expected returns, or discount rates, are high, the discounted benefits from the search process are low. Thus, unemployed workers engage in less intensive job searching. We build a Diamond-Mortensen-Pissarides search model with variable search intensity and Epstein-Zin preferences. We demonstrate that (a) the search return for unemployed workers equals firms' stock return; (b) variable search intensity amplifies both labor market volatilities and stock market risks, relative to fixed search intensity; and (c) search intensity negatively predicts stock market returns in the model, aligned with the data. In addition, through a variance decomposition, we show that the variation in the job search decisions of unemployed workers is mainly driven by discount rates, with little contribution from expected cash flows.

Keywords: Search Intensity, Labor Search Model, Return Predictability, Variance Decomposition, Unemployment, Vacancies

JEL Classification: E24, E32, E44, G12, J63, J64