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

Ravi Jagannathan, Keiichi Kubota and Hitoshi Takehara
The Journal of Business
Vol. 71, No. 3 (July 1998), pp. 319-347
DOI: 10.1086/209747
Stable URL:
Page Count: 30
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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% of the cross‐sectional variation in the average return on stock portfolios, the stock‐index beta and the labor beta together explain 75% 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.