Labor Market Networks and Asset Returns

59 Pages Posted: 27 Oct 2021

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Ali Sharifkhani

Northeastern University

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business

Date Written: October 27, 2021

Abstract

This paper proposes a measure of labor market connectivity based on the similarity in the composition of occupational knowledge characteristics across industries and provides evidence of return predictability in the cross-section of industries that are connected through the labor market. In long-short portfolios, an industry's return is strongly predicted by the past return of its labor-market-connected neighboring industries with an annualized return of up to 9%, which is not explained by established asset pricing models. The return predictability remains significant after controlling for the supply chain momentum as well as the industry lead-lag effect, and is concentrated in stocks with higher arbitrage costs and higher ownership of uninformed investors. We find similar predictive relations for the labor productivity, wages, employment, and profitability of labor connected industries. Our findings are consistent with positive spillover of productivity shocks among industries that are connected through the labor market. Informational frictions, costly arbitrage, and investors' limited attention magnify the delayed response of stock prices to the spillover of labor productivity shocks, which results in the observed return predictability.

Keywords: Labor network, labor productivity, cross section of stock returns.

JEL Classification: G11, G12, G13

Suggested Citation

Bali, Turan G. and Bae, Joon Woo and Sharifkhani, Ali and Zhao, Xiaofei, Labor Market Networks and Asset Returns (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3951333 or http://dx.doi.org/10.2139/ssrn.3951333

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Ali Sharifkhani

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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