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Relationship Between Labor-Income Risk and Average Return: Empirical Evidence from the Japanese Stock MarketKeiichi KubotaChuo University - Graduate School of Strategic Management Hitoshi TakeharaWaseda University Ravi JagannathanNorthwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); SAIF; ISB Journal of Business, Vol. 71, No. 3, July 1998 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 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. In Japan, the book-to-market-price characteristic can be adequately captured by particular factor-beta, as suggested by Fama and French (1993).
JEL Classification: G12, J31 Accepted Paper SeriesDate posted: July 22, 1998Suggested CitationContact Information
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