Does Premium Exist in the Stock Market for Labor Income Growth Rate? A Six-Factor-Asset-Pricing Model: Evidence From Pakistan

Abstract

The objective of this study is to explore Roy and Shijin [(2018). A six factor assets pricing model. Borsa Istanbul Review, 18(3), 205–217] six-factor-model of asset pricing by extending Fama and French five-factor model to include human capital as a sixth factor in the context of Pakistan — an emerging country in Asia, and to test the validity of the six-factor asset pricing model in explaining time-series variations in portfolio returns of Pakistan equity market. For this purpose, we use Fama and Macbeth’s two-pass time series regression technique to test the validity and applicability of the six-factor model. The findings indicate that the six factors model is an appropriate asset pricing model for explaining time-series variations in Pakistan. Furthermore, the human capital (labor income growth rate) is significant for most of the portfolios constructed in this study, which implies that the human capital significantly explains time-series variations in portfolio returns. The empirical results encourage all types of investors and academics to incorporate human capital into asset pricing models. It helps in more accurately estimating the required rate of return, which can improve asset pricing models.

Testing Daily Seasonality Using Value Premium Portfolios Returns: The Case of Pakistan

“…Interestingly, growth firm's returns input is more significant than the value firm in this period. These results are consistent with the findings of (Fama & French, 2021;Khan et al, 2022). Figure 4 highlights a similar return pattern with the lowest Monday and positive Friday, which enhances the influence of growth firms in gross profit to total assets portfolio.…”

Human capital-based four-factor asset pricing model: An empirical study from Pakistan

“…According to Ref. [ 24 ], in the context of emerging economies, i.e., Pakistan, portfolio managers and investors may benefit from considering the potential impact of the human capital factor in the asset pricing model. Which is still a relatively new concept, and it's great to see more research exploring its impact on stock returns.…”

“…Further, it finds that investment in human capital have significant impact on country economic development. Later [ 24 ], examined the effect of the labor-income-growth rate on stock returns. The authors find that labor-income-growth rate statistically predict the variability in asset returns.…”

“…Similarly, to this [ 23 ], proposed a six-factor asset pricing model (RS6) and added human capital to the FF5. Similarly [ 24 ], find that labor-income growth rate statistically captures the variation in asset returns.…”

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