Capital Share Risk and Shareholder Heterogeneity in U.S. Stock Pricing

Martin Lettau, Sydney Ludvigson and Sai Ma

No 10335, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Value and momentum portfolios exhibit strong opposite signed exposure to an aggregate risk factor based on low frequency fluctuations in the capital share. This strong opposite signed exposure helps explain why both strategies earn high average returns yet are negatively correlated. But the finding is puzzling from the perspective of canonical asset pricing theories. We show that opposite signed exposure to capital share risk coincides with opposite signed exposure of value and momentum to the income shares of households in the top 10 versus bottom 90 percent of the stock wealth distribution. We use a model of shareholder heterogeneity to explain why the capital share is likely to be an important cross-sectional risk factor, and show how the result can be explained if investors located in different percentiles of the wealth distribution exhibit a central tendency to pursue different investment strategies. Models with capital share risk explain up to 85% of the variation in average returns on size-book/market portfolios and up to 95% of momentum returns and the pricing errors on both sets of portfolios are lower than those of the Fama-French three- and four-factor models, the intermediary SDF model of Adrian, Etula, and Muir (2014), and models based on low frequency exposure to aggregate consumption risk. In a horse race where long-horizon capital share betas are included alongside betas for these other factors, the capital share beta remains strongly significant while the others are driven out.

Keywords: Capital share; Heterogeneous agents; Inequality; Labor share; Momentum; Value premium (search for similar items in EconPapers)
JEL-codes: E25 G11 G12 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP10335 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10335

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10335

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().