Is Human Capital Premium Price in Asset Pricing? Insights from South Africa During the COVID-19 Era

Abstract

Purpose—In recent years, numerous asset pricing models have demonstrated superior performance over traditional approaches in explaining the variability of asset returns. In this study, we empirically evaluate the efficiency of the augmented human capital six-factor model in the South African stock market over the period from July 2010 to June 2023.

Design/Methodology/Approach—This study constructs thirty-two portfolios using daily stock price data of non-financial firms. These portfolios are sorted based on size, value, profitability, investment, and labor income growth rate premium. Further, we employ Fama and Macbeth's (1973) time-series regression for the empirical analysis.

Findings—Findings indicate that small-size portfolios considerably earn higher returns than big-size portfolios. Additionally, we report that market, size, value, profitability, investment, and human capital premium significantly explain the time-series variability in excess portfolio returns. Further, the analysis also highlights that the COVID-19 pandemic induced substantial volatility in the South African stock market, which notably reduced the efficiency of the six-factor model during the pandemic period. To further assess model efficiency, we employ a Gibbons, Ross, and Shanken (GRS) test as part of the sub-sample analysis.

Practical Implications—The results provide valuable insights for policymakers, investors, and portfolio managers in constructing optimal portfolios for investment, particularly during the COVID-19 pandemic. Furthermore, the findings emphasize that investors should incorporate the human capital premium alongside other risk factors when valuing securities.

Originality/Value—First, this study significantly contributes to the existing literature on asset pricing models. Second, this study is the first which extend the Fama and French five-factor model in the South African market. Third, this study examines the efficiency of the augmented six-factor model during the COVID-19 pandemic. Fourth, this study highlights the performance of the augmented six-factors model and provides helpful suggestions for improving investing strategies during turbulent times.