Labor Income, Relative Wealth Concerns, and the Cross-section of Stock Returns

46 Pages Posted: 5 Mar 2008 Last revised: 17 Mar 2015

See all articles by Juan-Pedro Gomez

Juan-Pedro Gomez

IE Business School - IE University

Richard Priestley

Norwegian Business School

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: November 1, 2014

Abstract

The finance literature documents a relation between labor income and the cross-section of stock returns. One possible explanation for this is the hedging decisions of investors with relative wealth concerns. This implies a negative risk premium associated with stock returns correlated with local undiversifiable wealth, since investors are willing to pay more for stocks that help their hedging goals. We find evidence that is consistent with these regularities. In addition, we show that the effect varies across geographic areas depending on the size and variability of undiversifiable wealth, proxied by labor income.

Keywords: Labor income risk, relative wealth concerns, local risk hedging, negative risk premium

JEL Classification: G15, G12, G11

Suggested Citation

Gomez, Juan-Pedro and Priestley, Richard and Zapatero, Fernando, Labor Income, Relative Wealth Concerns, and the Cross-section of Stock Returns (November 1, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, AFA 2009 San Francisco Meetings Paper, EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102231 or http://dx.doi.org/10.2139/ssrn.1102231

Juan-Pedro Gomez

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain
+34 917821326 (Phone)

HOME PAGE: http://www.ie.edu/faculty/juan-pedro-gomez/

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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