Asset Prices and Capital Share Risks: Theory and Evidence

2020/06/24 by Joseph P. Byrne, Byrne, Joseph P., Boulis Maher Ibrahim +3
Economics, Econometrics and Finance · #Financial Markets and Investment Strategies #Monetary Policy and Economic Impact #Stochastic processes and financial applications

paper · doi:10.48550/arxiv.2006.14023

Abstract

An asset pricing model using long-run capital share growth risk has recently been found to successfully explain U.S. stock returns. Our paper adopts a recursive preference utility framework to derive an heterogeneous asset pricing model with capital share risks.While modeling capital share risks, we account for the elevated consumption volatility of high income stockholders. Capital risks have strong volatility effects in our recursive asset pricing model. Empirical evidence is presented in which capital share growth is also a source of risk for stock return volatility. We uncover contrasting unconditional and conditional asset pricing evidence for capital share risks.

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