Capital Share Risk in International Asset Pricing

Abstract

We study whether growth in the capital share (KS) of aggregate income (GDP) can explain equity portfolio returns in international stock markets as proposed by Lettau et al. (2019) for the U.S. market. We find that growth in local capital share has positive explanatory power for equity portfolio returns within Canada, Japan, and Emerging Markets as for instance India. Unlike the U.S. market, though, the information contained in the KS risk factor of these international markets does not subsume information contained in alternative factor models as for instance the Fama-French three factor or q-factor models, but rather adds additional explanatory content to these model specifications. At an aggregate level, a growth in capital share does hardly imply any growth in equity portfolio returns in the European and Pacific regions. We argue that reported differences might be driven by further macroeconomic variables as for instance a country’s level of private wealth inequality and its level of net public wealth as proposed within the most recent World Inequality Report by Alvaredo et al. (2018).

Keywords: capital share, labor share, wealth inequality, redistributive shocks, international stock markets

JEL Classification: G11, G12, G15, E25