Asset Prices with Labor and Jump Risk
Doctor of Philosophy
This dissertation investigates the asset pricing implications of labor-induced leverage and the incidence of jumps. Due to wage stickiness and firm-specific human capital, labor induces operating leverage that contributes to the risk exposure of the firm. This leverage produces momentum in returns as well as a positive relationship between profits and subsequent returns. Empirically, momentum and profitability returns are more pronounced in the presence of labor-induced operating leverage. A novel implication of the model is that recession-resistant stocks earn higher returns during subsequent expansions. This prediction holds empirically and is distinct from other anomalies. The entire annual return of a typical stock accrues on the four trading days when its price "jumps". Consistent with an idiosyncratic jump risk premium, prices decline by over 2% in the 30 days prior to both positive and negative jumps. This negative drift is proportional to changes in option implied jump probabilities over the period. Both the jump premium and the negative drift are present during periods of low jump clustering and are related to proxies for investor diversification and limits to arbitrage.
Labor; Operating Leverage; Human Capital; Idiosyncratic Jump.