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 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. 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. In Japan, the book-to-market-price characteristic can be adequately captured by particular factor-beta, as suggested by Fama and French (1993)