Working Paper: NBER ID: w20744
Authors: Martin Lettau; Sydney C. Ludvigson; Sai Ma
Abstract: 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.
Keywords: capital share; asset pricing; income inequality; expected returns
JEL Codes: E25; G11; G12
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) | expected returns across various equity characteristic portfolios and non-equity asset classes (G11) |
| positive exposure to capital share risk (G11) | positive risk premium (G19) |
| capital share (D33) | income of the top 5-10% of stock market wealth holders (E25) |
| capital share (D33) | income of the bottom 90% (D31) |
| capital share growth (D33) | expected returns (G17) |
| capital share risk (D33) | cross-section of expected returns (G12) |