The Role of Human Capital in Explaining Asset Return Dynamics in the Indian Stock Market During the COVID Era

Eleftherios Thalassinos, Naveed Khan, Mustafa Afeef, Hassan Zada and Shakeel Ahmed ()
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Eleftherios Thalassinos: Department of Maritime Studies, Faculty of Maritime and Industrial Studies, University of Piraeus, 185-33 Piraeus, Greece
Naveed Khan: Faculty of Management Sciences, International Islamic University, Islamabad 44000, Pakistan
Mustafa Afeef: Faculty of Management Sciences, Islamia College Peshawar, Peshawar 25120, Pakistan
Hassan Zada: Faculty of Management Sciences, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST University), Islamabad 44000, Pakistan
Shakeel Ahmed: Department of Management Sciences, HITEC University, Taxila 47080, Pakistan

Risks, 2025, vol. 13, issue 7, 1-27

Abstract: Over the past decade, multifactor models have shown enhanced capability compared to single-factor models in explaining asset return variability. Given the common assertion that higher risk tends to yield higher returns, this study empirically examines the augmented human capital six-factor model’s performance on thirty-two portfolios of non-financial firms sorted by size, value, profitability, investment, and labor income growth in the Indian market over the period July 2010 to June 2023. Moreover, the current study extends the Fama and French five-factor model by incorporating a human capital proxy by labor income growth as an additional factor thereby proposing an augmented six-factor asset pricing model (HC6FM). The Fama and MacBeth two-step estimation methodology is employed for the empirical analysis. The results reveal that small-cap portfolios yield significantly higher returns than large-cap portfolios. Moreover, all six factors significantly explain the time-series variation in excess portfolio returns. Our findings reveal that the Indian stock market experienced heightened volatility during the COVID-19 pandemic, leading to a decline in the six-factor model’s efficiency in explaining returns. Furthermore, Gibbons, Ross, and Shanken (GRS) test results reveal mispricing of portfolio returns during COVID-19, with a stronger rejection of portfolio efficiency across models. However, the HC6FM consistently shows lower pricing errors and better performance, specifically during and after the pandemic era. Overall, the results offer important insights for policymakers, investors, and portfolio managers in optimizing portfolio selection, particularly during periods of heightened market uncertainty.

Keywords: risk and return; asset pricing models; human capital; COVID-19 pandemic; Fama and MacBeth regression (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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