Human capital in asset pricing: The case of the Brazilian stock market during crisis periods

In recent years, multi-factor models outperformed traditional models in explaining the cross-sectional variability in asset returns. Therefore, the current study examines the performance of the human capital-based six-factor model in the Brazilian stock market for the period spanning from July 2010 to June 2023. This study takes daily stock price data of non-financial firms and constructs a set of thirty-two portfolios sorted on size, value, profitability, investment, and labor income growth. Moreover, this study includes human capital as an additional factor in the Fama and French five-factor model, thus proposing an augmented six-factor model. We use Fama and Macbeth's (1973) two-step estimation approach for the empirical analysis. Findings indicate that small stock portfolios earn higher returns than big ones. Further, findings reveal that market size, value, profitability, investments, and labor income growth (proxy of human capital) premium significantly explain the time series variability in excess portfolio returns. Furthermore, we find that the Brazilian economic crisis and the COVID-19 pandemic create identical volatility in the stock markets, which reduces the performance of the six-factor model during an economic crisis and pandemic period. Additionally, we employ the Gibbons, Ross, and Shanken (GRS) test to evaluate the model's performance in sub-sample analysis. Lastly, the findings report important implications for policymakers, investors, and portfolio managers to select appropriate portfolios for investment during economic turmoil.