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Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility

Author

Listed:
  • Jessica Wachter

    (University of Pennsylvania)

  • Mete Kilic

    (The Wharton School, University of Pennsylvania)

Abstract

What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability implies greater risk and lower future growth, lowering the incentives of firms to invest in hiring. During periods of high risk, stock market valuations are low and unemployment rises. The model thus explains volatility in equity and labor markets, and the relation between the two.

Suggested Citation

  • Jessica Wachter & Mete Kilic, 2017. "Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility," 2017 Meeting Papers 129, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:129
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    References listed on IDEAS

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