DP12628 Capital Share Risk in U.S. Asset Pricing

Author(s): Martin Lettau, Sydney C. Ludvigson, Sai Ma
Publication Date: January 2018
Keyword(s): capital share, inequality, Labor Share, value premium
JEL(s): E25, G11, G12
Programme Areas: Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12628

A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and non-equity asset classes, with risk price estimates that are of the same sign and similar in magnitude. Positive exposure to capital share risk earns a positive risk premium, commensurate with recent asset pricing models in which redistributive shocks shift the share of income between the wealthy, who finance consumption primarily out of asset ownership, and workers, who finance consumption primarily out of wages and salaries.