Research

Working Papers

Labor Adjustment Cost: Implications from Asset Prices

(Job Market Paper)

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This paper studies the macroeconomic and asset pricing implications arising from the labor adjustment cost. I implement a novel crosswalk linking three micro-level datasets and measure the hours margin of a firm’s labor input. At the firm level, a 1 percentage point increase in hours growth is associated with a 0.6 percentage point decrease in future annual equity return. A production-based asset pricing model incorporating non-convex, linear, and convex labor adjustment cost components matches key moments of real quantities and asset prices. Consistent with the data, the model implies that firms face labor adjustment cost mostly in the form of production disruption, 20% of which occurs along the hours margin. I use the model to empirically measure a macroeconomic shock that reduces labor adjustment cost. Consistent with the model, the data suggests a negative price of such shock. Therefore, firms adjusting hours more produce more consumption goods in high marginal utility states and earn lower equity returns in equilibrium.

The Human Capital Quantity CAPM

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If the labor income is the dividend from human capital value, then the labor hours is the dividend from human capital quantity (HCQ). This paper proposes a novel economic mechanism that matches the procyclical labor hours and countercyclical risk premium. When utility is nonseparable between HCQ and consumption, the equilibrium stochastic discount factor (SDF) increases in the HCQ-consumption ratio. Structural estimation of the model matches U.S. postwar macroeconomic data, and the SDF implied linear factor model explains 90% of the cross-sectional variation in Fama-French portfolios. Overall, my results suggest that HCQ-consumption ratio is an important macroeconomic risk factor.

Work in Progress

Reasonable Risk Aversion (with Marianne Baxter)

The Hours Premium in U.S. Asset-Pricing

Firm-Level Political Risk in China