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

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  • Kim, Dongcheol
  • Kim, Tong Suk
  • Min, Byoung-Kyu

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 1 (January)
Pages: 67-81

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:1:p:67-81

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Future labor income growth Fama-French factors Economic tracking portfolio Intertemporal CAPM;

References

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Citations

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Cited by:
  1. Massimo Guidolin & Stuart Hyde, 2012. "Optimal Portfolios for Occupational Funds under Time-Varying Correlations in Bull and Bear Markets? Assessing the Ex-Post Economic Value," Working Papers 455, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Xiao, Yuchao & Faff, Robert & Gharghori, Philip & Min, Byoung-Kyu, 2013. "Pricing innovations in consumption growth: A re-evaluation of the recursive utility model," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4465-4475.
  3. Min, Byoung-Kyu & Kim, Tong Suk, 2012. "Are good-news firms riskier than bad-news firms?," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1528-1535.
  4. Kim, Soon-Ho & Kim, Dongcheol & Shin, Hyun-Soo, 2012. "Evaluating asset pricing models in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 198-227.
  5. Kang, Jangkoo & Kim, Tong Suk & Lee, Changjun & Min, Byoung-Kyu, 2011. "Macroeconomic risk and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3158-3173.

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