Title: An equilibrium asset pricing model with labor market search
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.