Investments, tenth edition

  Private (Nontraded) Business 

 Whereas Jagannathan and Wang focus on labor income, Heaton and Lucas  

16

    estimate  the 

importance of proprietary business. We expect that private-business owners will reduce 

demand for traded securities that are positively correlated with their specific entrepreneurial 

income. If this effect is sufficiently important, aggregate demand for traded securities will 

be determined in part by the covariance with aggregate noncorporate business income. The 

risk premium on securities with high covariance with noncorporate business income should 

be commensurately higher.

 

Table 13.2

Evaluation of various CAPM specifications

This table gives the estimates for the cross-sectional regression model

E(R

it

)

5 c

0

1 c

size

log(ME

i

)

1 c

vw

b

i

vw

1 c

prem

b

i

prem

1 c

labor

b

i

labor

with either a subset or all of the variables. Here, R

it

 is the return on portfolio i (i 5 1, 2, . . . , 100) in month t (July 1963–December 

1990), R

t

vw

 is the return on the value-weighted index of stocks, R

t

21

prem

 is the yield spread between low- and high-grade corporate 

bonds, and R

t

labor

 is the growth rate in per capita labor income. The b

i

vw

 is the slope coefficient in the OLS regression of R

it

 on a 

constant and R

t

vw

. The other betas are estimated in a similar way. The portfolio size, log(ME

i

), is calculated as the equally weighted 

average of the logarithm of the market value (in millions of dollars) of the stocks in portfolio i. The regression models are estimated 

by using the Fama-MacBeth procedure. The “corrected t-values” take sampling errors in the estimated betas into account. All R

2

s are 

reported as percentages.