Future labor income growth and the cross-section of equity returns

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This paper examines the equilibrium relation between future labor income growth and expected asset returns; it proposes revisions in the expectation of future labor income growth as a macroeconomic state variable and suggests a three-factor model, including a factor related to this variable, along with the consumption growth factor and the market factor. The proposed future labor income growth factor is positively associated with the Fama-French factors and subsumes their explanatory power in explaining the cross-section of stock returns. These results provide a possible economic explanation for the roles of the Fama-French factors: they are compensation for higher exposure to the risk related to changes in the value of human capital. This paper also compares the performance of the proposed three-factor model with other competing models and finds that the proposed model specification better captures cross-sectional variation in average returns than any of the competing asset pricing models considered. (C) 2010 Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2011-01
Language
English
Article Type
Article
Keywords

EXPECTED STOCK RETURNS; BOOK-TO-MARKET; CONSISTENT COVARIANCE-MATRIX; BETA-PRICING MODELS; COMMON RISK-FACTORS; ASSET RETURNS; TEMPORAL BEHAVIOR; CONSUMPTION; NEWS; SIZE

Citation

JOURNAL OF BANKING & FINANCE, v.35, pp.67 - 81

ISSN
0378-4266
DOI
10.1016/j.jbankfin.2010.07.014
URI
http://hdl.handle.net/10203/98540
Appears in Collection
MT-Journal Papers(저널논문)
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