The Human Capital That Matters: Expected Returns and High-Income Households
Review of Financial Studies, 2016, 29(9): 2523-2563
56 Pages Posted: 15 Sep 2007 Last revised: 15 Oct 2016
Date Written: December 17, 2015
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.
Keywords: human capital, income risk, affluent investors, stock returns
JEL Classification: G14
Suggested Citation: Suggested Citation