Sectoral Labor Reallocation and Return Predictability

89 Pages Posted: 5 May 2015 Last revised: 7 Mar 2023

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

Northeastern University

Date Written: February 1, 2023

Abstract

Sectoral labor reallocation shocks change the optimal allocation of workers across industries. We show that the cross-sectional dispersion in industry-specific stock returns (CSV) serves as a good proxy for this type of labor market shocks. CSV predicts aggregate unemployment growth as well as the ex-post mismatch between job seekers and vacancies across sectors. We find that CSV has strong and robust predictive power for future stock market returns and easily outperforms 12 well-known existing predictive variables. In predictive regressions, the one-year out-of-sample R^2 is as high as 12.6%. We propose a production-based asset pricing model in which sectoral labor reallocation shocks generate return predictability through time–varying exposure to aggregate productivity risk. New testable implications are supported by the data.

Keywords: Financial Markets and the Macroeconomy, Return Predictability, Sectoral Shifts, Production-Based Asset Pricing

JEL Classification: G12, G17

Suggested Citation

Eiling, Esther and Kan, Raymond and Sharifkhani, Ali, Sectoral Labor Reallocation and Return Predictability (February 1, 2023). Rotman School of Management Working Paper No. 2602215, Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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 M5S3E6
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Ali Sharifkhani

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
470
Abstract Views
2,725
Rank
115,532
PlumX Metrics