Working Paper: NBER ID: w28693
Authors: Susanto Basu; Giacomo Candian; Ryan Chahrour; Rosen Valchev
Abstract: We identify a shock that explains the bulk of fluctuations in equity risk premia, and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time labor positions, and towards part-time and flexible contract workers. We develop a novel real model with labor market frictions and fluctuations in risk appetite, where a “flight-to-safety” reallocation from riskier to safer factors of production precipitate a recession that can explain the data, since the safer factors offer lower marginal products in equilibrium.
Keywords: risk premium; business cycles; macro aggregates
JEL Codes: E24; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk premium shock (G19) | equity risk premium (G12) |
| equity risk premium (G12) | output (C67) |
| equity risk premium (G12) | consumption (E21) |
| equity risk premium (G12) | investment (G31) |
| equity risk premium (G12) | employment (J68) |
| risk premium shock (G19) | recession (E32) |
| recession (E32) | falling macroeconomic aggregates (E10) |
| risk premium shock (G19) | aggregate profits (E10) |
| risk premium shock (G19) | inflation (E31) |