Asset Pricing: Frictions and Market Efficiency
Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Joseph Engelberg, University of California-San Diego
Labor Links and Shock Transmissions
AbstractWe construct a time-varying network of labor market competitors for all public companies in the United States using the near-universe of online job postings. We show that the labor network is important in transmitting both labor and industry shocks. There are three main findings in this paper. First, we find that the overlap between a firm's labor market competitors and its product market rivals is less than 20 percent, suggesting that firms can face vastly different labor market and industry competitors. Second, firm returns strongly respond to both the contemporaneous and lagged labor market shocks proxied by returns of the labor competitors. A long-short strategy exploiting the lagged response generates an average annualized excess return of 9.36 percent. We refer to this return predictability as "labor momentum". We find that the "labor momentum" effect is stronger among small firms, firms with low analyst coverage, and firms with low institutional ownership. The results are consistent with the idea that investors fail to fully incorporate information about the labor market, leading to predictable returns. Third, shocks to an industry can affect firms outside the industry through the labor network. We show that following the financial crisis, the non-financial firms that are close to the financial sector in the labor market network upskill more and have better financial performance, compared to the firms that are far away.
AbstractRational and behavioral asset pricing theories offer conflicting interpretations of the covariance structure of asset returns. Return comovement beyond what prespecified empirical factor models can explain is often interpreted in favor of frictions or behavioral explanations. However, we show that randomly grouped assets exhibit ``excess'' comovement that is ubiquitous and indistinguishable from the comovement of economically motivated groupings advanced in the literature. Our finding is consistent with the presence of a latent factor that could be derived from multiple sources of systematic variation, including rational sources. We propose new statistical tests that account for latent factors when detecting excess comovement.
- G1 - General Financial Markets