Industry-Specific Human Capital, Idiosyncratic Risk and the Cross-Section of Expected Stock Returns

Abstract:     
Human capital is one of the largest assets in the economy and in theory it may play an important role for asset pricing. Human capital is heterogeneous across investors and one source of heterogeneity is industry affiliation. I show that the cross-section of expected stock returns is primarily affected by industry-level rather than aggregate labor income risk. Furthermore, when human capital is excluded from the asset pricing model, the resulting idiosyncratic risk may appear to be priced. I find that the premium for idiosyncratic risk documented by several empirical studies depends on the covariance between stock and human capital returns.

Number of Pages in PDF File: 73

Keywords: Industry-specific human capital, nontradable assets, idiosyncratic volatility, cross-section of expected stock returns

JEL Classification: G11, G12

Accepted Paper Series