Review of Financial Studies Vol. 29 No. 9 2016
The Human Capital That Matters: Expected Returns and High-Income Households
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.
- DOI
- 10.1093/rfs/hhw048
- Volume
- 29
- Issue
- 9
- Pages
- 2523-2563
- Language
- en
- Sources
- openalex crossref