Risk premia and unemployment fluctuations

We study the role of fluctuations in discount rates for the joint dynamics of expected returns in the stock market and employment dynamics. We construct a non-parametric bound on the predictability and time-variation in conditional volatility of the firm’s profit flow that must be met to rationalize the observed business-cycle fluctuations in vacancy-filling rates. A stochastic discount factor consistent with conditional moments of the risk-free rate and expected returns on risky assets only partly alleviates the need for an excessively volatile model of the expected profit flow.