A Labor Capital Asset Pricing Model

Mikhail Simutin, JessieJiaxu Wang and Lars Kuehn
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Mikhail Simutin: University of Toronto
JessieJiaxu Wang: Carnegie Mellon University
Lars Kuehn: Carnegie Mellon University

No 695, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We show that labor search frictions are an important determinant of the cross-section of equity returns. In the data, sorting firms by loadings on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the efficiency of the matching technology. Firms with low loadings are not hedged against adverse matching efficiency shocks and require higher expected stock returns.

Date: 2014
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