Skip Navigation


RFS Advance Access originally published online on October 28, 2005
Review of Financial Studies 2006 19(1):1-44; doi:10.1093/rfs/hhj006
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
19/1/1    most recent
hhj006v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Similar articles in ISI Web of Science
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrow Search for citing articles in:
ISI Web of Science (9)
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Santos, T.
Right arrow Articles by Veronesi, P.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2005. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Labor Income and Predictable Stock Returns

Tano Santos
Columbia University and NBER

Pietro Veronesi
University of Chicago, NBER, and CEPR

Address correspondence to Pietro Veronesi, University of Chicago GSB, 5807 South Woodlawn Avenue, Chicago IL 60637, or e-mail: fpverone{at}gsb.uchicago.edu.

We propose a novel economic mechanism that generates stock return predictability in both the time series and the cross-section. Investors’ income has two sources, wages and dividends that grow stochastically over time. As a consequence the fraction of total income produced by wages fluctuates depending on economic conditions. We show that the risk premium that investors require to hold stocks varies with these fluctuations. A regression of stock returns on lagged values of the labor income to consumption ratio produces statistically significant coefficients and large adjusted R2s. Tests of the model’s cross-sectional predictions on the set of 25 Fama–French portfolios sorted on size and book-to-market are also met with considerable support.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 REV FINANC STUDHome page
G. M. Korniotis
Habit Formation, Incomplete Markets, and the Significance of Regional Risk for Expected Returns
Rev. Financ. Stud., August 22, 2008; (2008) hhn074v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
Y. Amihud, C. M. Hurvich, and Y. Wang
Multiple-Predictor Regressions: Hypothesis Testing
Rev. Financ. Stud., June 13, 2008; (2008) hhn056v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
J. H. Cochrane, F. A. Longstaff, and P. Santa-Clara
Two Trees
Rev. Financ. Stud., January 1, 2008; 21(1): 347 - 385.
[Abstract] [Full Text] [PDF]


Disclaimer:
Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.