An equilibrium asset pricing model with labor market search
By: Lars-Alexander Kuehn, Nicolas Petrosky-Nadeau, Lu Zhang
Contributors: Petrosky-Nadeau, Nicolas, 1980-; Zhang, Lu; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17742; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17742.
Publisher: National Bureau of Economic Research
Published: 2012
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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)"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 3/6/2012.

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