Relationship between Labor-Income Risk and Average Return: Empirical Evidence from the Japanese Stock Market.

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. The authors find that the labor beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. Copyright 1998 by University of Chicago Press.