Implications of Labor Market Frictions for Risk Aversion and Risk Premia

Eric Swanson

No 2013-30, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along both margins can greatly alter the household?s attitudes toward risk, as shown in Swanson (2012). The present paper analyzes how frictional labor markets affect that analysis. Risk aversion is higher: 1) in recessions, 2) in countries with more frictional labor markets, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. Traditional, fixed-labor measures of risk aversion show no stable relationship to the equity premium in a standard real business cycle model with search frictions, while the closed-form expressions derived in the present paper match the equity premium closely.

JEL-codes: D81 E24 E44 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013
New Economics Papers: this item is included in nep-dge and nep-upt
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Related works:
Journal Article: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2020)
Working Paper: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2019)
Working Paper: Implications of Labor Market Frictions for Risk Aversion and Risk Premia (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2013-30

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DOI: 10.24148/wp2013-30

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