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Sectoral Labor Reallocation and Return Predictability

Esther Eiling (), Raymond Kan and Ali Sharifkhani
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Esther Eiling: University of Amsterdam
Raymond Kan: Rotman School of Management, University of Toronto
Ali Sharifkhani: Rotman School of Management, University of Toronto

No 2018-006, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: Sectoral labor reallocation shocks change the optimal allocation of workers across industries. We find that a proxy for this type of labor market shocks has very strong and robust predictive power for future stock market returns. In predictive regressions, the one-year out-of-sample R2 is as high as 14.88%. We propose a production-based asset pricing model that links the return predictability to time-varying labor adjustment costs. When human capital is tied to the industry, hiring workers from other industries involves more search and training costs. Hence, sectoral reallocation shocks lead to lower returns to hiring and therefore lower future stock returns.

Keywords: financial markets; macroeconomics; Return Predictability; sectoral shifts; production-based asset pricing (search for similar items in EconPapers)
JEL-codes: G12 G17 (search for similar items in EconPapers)
Date: 2018
Note: M
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http://humcap.uchicago.edu/RePEc/hka/wpaper/Eiling ... r_return-predict.pdf First version, February 2, 2018 (application/pdf)

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