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

See all articles by Sean D. Campbell

Sean D. Campbell

Board of Governors of the Federal Reserve System

Stefanos Delikouras

University of Miami - Department of Finance

Danling Jiang

College of Business, Stony Brook University

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Date Written: December 17, 2015

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.

Keywords: human capital, income risk, affluent investors, stock returns

JEL Classification: G14

Suggested Citation

Campbell, Sean D. and Delikouras, Stefanos and Jiang, Danling and Korniotis, George M., The Human Capital That Matters: Expected Returns and High-Income Households (December 17, 2015). Review of Financial Studies, 2016, 29(9): 2523-2563, Available at SSRN: https://ssrn.com/abstract=1014673 or http://dx.doi.org/10.2139/ssrn.1014673

Sean D. Campbell

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Danling Jiang

College of Business, Stony Brook University ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

HOME PAGE: http://sites.google.com/site/danlingjiang

George M. Korniotis (Contact Author)

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

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