DOES PREMIUM EXIST IN THE STOCK MARKET FOR LABOR INCOME GROWTH RATE? A SIX-FACTOR-ASSET-PRICING MODEL: EVIDENCE FROM PAKISTAN

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.