Is Personal Savings Rate Priced in the Cross-section of Stock Returns?

Abstract

This paper investigates the importance of the personal savings rate in the cross-sectional pricing of individual stocks. I estimate each stock's monthly-varying sensitivity to the personal savings rate and show that stocks in the lowest savings rate beta quintile generate 5.76% (5.28%) more annualized value (equal)-weighted five-factor alpha compared to stocks in the highest savings beta quintile. The savings premium is driven by the outperformance (underperformance) of stocks with negative (positive) savings rate beta. Moreover, the alpha spread between the highest and the lowest savings rate beta stocks increases during high economic uncertainty, low credit availability, and high income risk periods.

Keywords: Personal savings rate, cross-section of returns, return predictability, economic uncertainty, labor income growth.

JEL Classification: G11, G12, E20, E21