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

  • Kim, Dongcheol
  • Kim, Tong Suk
  • Min, Byoung-Kyu
Registered author(s):

    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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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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