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Sectoral Labor Reallocation and Return Predictability

Author

Listed:
  • Esther Eiling

    (University of Amsterdam)

  • Raymond Kan

    (Rotman School of Management, University of Toronto)

  • Ali Sharifkhani

    (Rotman School of Management, University of Toronto)

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.

Suggested Citation

  • Esther Eiling & Raymond Kan & Ali Sharifkhani, 2018. "Sectoral Labor Reallocation and Return Predictability," Working Papers 2018-006, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2018-006
    Note: M
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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Eiling_Kan_Sharifkhani_2018_sectoral-labor_return-predict.pdf
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    More about this item

    Keywords

    financial markets; macroeconomics; Return Predictability; sectoral shifts; production-based asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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