Searching for the equity premium

A dynamic stochastic general equilibrium model with recursive utility, search frictions, and capital accumulation is a good start to forming unified theory of asset prices business cycles. The reproduces an equity premium 4.27% per annum, stock market volatility 12.42%, average interest rate 1.97%, while retaining plausible cycle dynamics. are strongly countercyclical, whereas the consumption growth largely unpredictable. Because wage inertia, dividends procyclical despite smoothing via investment. welfare cost cycles huge, 33.6%.