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Relationship between labor-income risk and average return: empirical evidence from the Japanese stock market

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  • Ravi Jagannathan
  • Keiichi Kubota
  • Hitoshi Takehara

Abstract

In Japan, as in the United States, stocks that are more sensitive to changes in the monthly growth rate of labor income earn a higher return on average. Whereas the stock-index beta can only explain 2 percent of the cross-sectional variation in the average return on stock portfolios, the stock-index beta and the labor-beta together explain 75 percent of the variation. We find that the labor-beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. We explore the extent to which these results are an artifact of seasonal patterns in labor-income growth rates as well as asset returns. In Japan, the book-to-market-price characteristic can be adequately captured by a particular factor-beta, as suggested by Fama and French (1993). This is in contrast to the findings reported by Daniel and Titman (1997) for the United States.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 117.

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Date of creation: 1997
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Handle: RePEc:fip:fedmem:117

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Keywords: Labor supply ; Stock - Prices ; Japan;

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  4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
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  7. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
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  18. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1739-64, December.
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  23. Kandel, Shmuel & Stambaugh, Robert F, 1995. " Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 157-84, March.
  24. Hamao, Yasushi, 1988. "An empirical examination of the Arbitrage Pricing Theory : Using Japanese data," Japan and the World Economy, Elsevier, Elsevier, vol. 1(1), pages 45-61, October.
  25. MacKinlay, A Craig & Richardson, Matthew P, 1991. " Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 511-27, June.
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