Working Paper: CEPR ID: DP12628
Authors: Martin Lettau; Sydney Ludvigson; Sai Ma
Abstract: A single macroeconomic factor based on growth in the capital share of aggregate incomeexhibits signiÖcant explanatory power for expected returns across a range of equity characteristicportfolios and non-equity asset classes, with risk price estimates that are of thesame sign and similar in magnitude. Positive exposure to capital share risk earns a positiverisk premium, commensurate with recent asset pricing models in which redistributive shocksshift the share of income between the wealthy, who Önance consumption primarily out ofasset ownership, and workers, who Önance consumption primarily out of wages and salaries.
Keywords: Value Premium; Capital Share; Labor Share; Inequality
JEL Codes: G11; G12; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth in the capital share of aggregate income (D33) | significant explanatory power for expected returns (G17) |
| capital share growth (D33) | positive risk premium (G19) |
| fluctuations in the capital share (D33) | source of risk for asset owners (G32) |
| capital share growth (D33) | explains a larger fraction of expected returns than traditional models (G17) |
| capital share growth (D33) | statistically significant relationship with expected returns (G17) |
| capital share growth (D33) | null results for industry portfolios and momentum strategies (G19) |