Labor Rigidity and the Dynamics of the Value Premium

Roberto Marfe ()

No 460, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash- flow durations rationalizes these stylized facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.

Keywords: value premium; labor rigidity; term-structure; predictability; duration (search for similar items in EconPapers)
JEL-codes: D51 E21 G12 (search for similar items in EconPapers)
Pages: pages 49
Date: 2016
New Economics Papers: this item is included in nep-dcm and nep-mac
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https://www.carloalberto.org/wp-content/uploads/2018/11/no.460.pdf (application/pdf)

Related works:
Working Paper: Labor Rigidity and the Dynamics of the Value Premium (2017)
Working Paper: Labor Rigidity and the Dynamics of the Value Premium (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:460

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