The Human Capital That Matters: Expected Returns and High-Income Households

Sean D. Campbell, Stefanos Delikouras, Danling Jiang and George M. Korniotis

The Review of Financial Studies, 2016, vol. 29, issue 9, 2523-2563

Abstract: We propose a novel human capital model that decomposes aggregate income risk into high- and low-income risk. We find that high-income risk is priced, while low-income risk is insignificant. The high-income factor alone explains 77% of the cross-sectional variation in the twenty-five size and book-to-market portfolios, earns a risk premium of about 7% per year, and its pricing power extends to the full cross-section of individual stocks. It is also related to the value factor, suggesting that the value premium might be compensation for income risk. Overall, our evidence indicates that high-income risk is an important macroeconomic risk factor. Received April 21, 2010; accepted January 25, 2016, by Editor Geert Bekaert.

Date: 2016
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