Sectoral Labor Reallocation and Return Predictability

61 Pages Posted: 5 May 2015 Last revised: 6 Feb 2018

See all articles by Esther Eiling

Esther Eiling

University of Amsterdam - Amsterdam Business School

Raymond Kan

University of Toronto - Rotman School of Management

Ali Sharifkhani

University of Toronto - Rotman School of Management

Date Written: February 2, 2018

Abstract

Sectoral labor reallocation shocks change the optimal allocation of workers across industries. We find that a proxy for this type of labor market shocks has very strong and robust predictive power for future stock market returns. In predictive regressions, the one-year out-of-sample R2 is as high as 14.88%. We propose a production-based asset pricing model that links the return predictability to time-varying labor adjustment costs. When human capital is tied to the industry, hiring workers from other industries involves more search and training costs. Hence, sectoral reallocation shocks lead to lower returns to hiring and therefore lower future stock returns.

Keywords: Financial Markets and the Macroeconomy, Return Predictability, Sectoral Shifts, Unemployment, Information Diffusion

JEL Classification: G12, G17

Suggested Citation

Eiling, Esther and Kan, Raymond and Sharifkhani, Ali, Sectoral Labor Reallocation and Return Predictability (February 2, 2018). Rotman School of Management Working Paper No. 2602215. Available at SSRN: https://ssrn.com/abstract=2602215 or http://dx.doi.org/10.2139/ssrn.2602215

Esther Eiling (Contact Author)

University of Amsterdam - Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

Raymond Kan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Ali Sharifkhani

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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