An Equilibrium Asset Pricing Model with Labor Market Search

Lars-Alexander Kuehn, Nicolas Petrosky-Nadeau and Lu Zhang ()
Additional contact information
Lars-Alexander Kuehn: Carnegie Mellon University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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).

JEL-codes: E21 E24 E40 G12 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID19 ... ctid=1979625&mirid=1

Related works:
Working Paper: An Equilibrium Asset Pricing Model with Labor Market Search (2012)
Working Paper: An Equilibrium Asset Pricing Model with Labor Market Search
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-01

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().