The Role of Human Capital in Explaining the Cross-Sectional Variation of FTSE 100 Stock Returns

Abstract

In this paper the Standard CAPM, the Labour CAPM, the Conditional CAPM and the Conditional Labour CAPM were tested on FTSE 100 return data over the period 1984–2004. When human capital is incorporated into the market portfolio the CAPM is able to explain additional cross sectional variation in FTSE 100 stock returns. More importantly, when the cross-sectional regression method is refined to incorporate information relating to the sign of the market realisation in the test period the relationship between beta and return is statistically significant.