An Equilibrium Asset Pricing Model with Labor Market Search

Lars-Alexander Kuehn, Nicolas Petrosky-Nadeau and Lu Zhang ()

No 17742, NBER Working Papers from National Bureau of Economic Research, Inc

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: G12 J23 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP EFG LS
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Citations: View citations in EconPapers (16)

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Working Paper: An Equilibrium Asset Pricing Model with Labor Market Search (2011)
Working Paper: An Equilibrium Asset Pricing Model with Labor Market Search
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