Human capital in asset pricing: The case of the Brazilian stock market during crisis periods
Human capital in asset pricing: The case of the Brazilian stock market during crisis periods

Summary/Abstract: In recent years, multi-factor models outperformed traditional models in explaining thecross-sectional variability in asset returns. Therefore, the current study examines the performanceof the human capital-based six-factor model in the Brazilian stock market for the period spanningfrom July 2010 to June 2023. This study takes daily stock price data of non-financial firms andconstructs a set of thirty-two portfolios sorted on size, value, profitability, investment, and laborincome growth. Moreover, this study includes human capital as an additional factor in the Famaand French five-factor model, thus proposing an augmented six-factor model. We use Fama andMacbeth's (1973) two-step estimation approach for the empirical analysis. Findings indicate thatsmall stock portfolios earn higher returns than big ones. Further, findings reveal that market size,value, profitability, investments, and labor income growth (proxy of human capital) premiumsignificantly explain the time series variability in excess portfolio returns. Furthermore, we find thatthe Brazilian economic crisis and the COVID-19 pandemic create identical volatility in the stockmarkets, which reduces the performance of the six-factor model during an economic crisis andpandemic period. Additionally, we employ the Gibbons, Ross, and Shanken (GRS) test to evaluatethe model's performance in sub-sample analysis. Lastly, the findings report important implicationsfor policymakers, investors, and portfolio managers to select appropriate portfolios for investmentduring economic turmoil.

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