Labor Rigidity and the Dynamics of the Value Premium

57 Pages Posted: 27 May 2015 Last revised: 29 Nov 2017

See all articles by Roberto Marfè

Roberto Marfè

University of Turin - Collegio Carlo Alberto

Date Written: January 15, 2015

Abstract

This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash-flow durations rationalizes these facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.

Keywords: value premium, labor rigidity, term-structure, predictability, duration

JEL Classification: D51, E21, G12

Suggested Citation

Marfè, Roberto, Labor Rigidity and the Dynamics of the Value Premium (January 15, 2015). Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2610565 or http://dx.doi.org/10.2139/ssrn.2610565

Roberto Marfè (Contact Author)

University of Turin - Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10122
Italy

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