Skip to main content

Relationship Between Labor-Income Risk and Average Return: Empirical Evidence From the Japanese Stock Market

Discussion Paper 117 | Published June 1, 1997

Download PDF

Authors

Hitoshi Takehara

Keiichi Kubota

Ravi Jagannathan

Relationship Between Labor-Income Risk and Average Return: Empirical Evidence From the Japanese Stock Market

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 beta 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. We explore the extent to which these results are an artifact of seasonal patterns in labor-income growth rates as well as asset returns. In Japan, the book-to-market-price characteristic can be adequately captured by a particular factor-beta, as suggested by Fama and French (1993). This is in contrast to the findings reported by Daniel and Titman (1997) for the United States.


Published In: Journal of Business (Vol. 71, No. 3, July 1998, pp. 319-347)